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1 Genie The core mission of the Finance Institute ( TFI ) is to educate, enlighten and inspire individuals to transform their actions into success. TFI delivers on this mission by offering the most informationpacked, true-to-life-on-line training and ongoing education programs available in the industry today. All of our programs have been developed by leading industry practitioners that harness their knowledge, experience and success in delivering comprehensive but, practical training, education and support to people of all levels of expertise (no prior knowledge, experience or special education required). Whether you are a novice or a seasoned professional in the financial services arena TFI has the educational program and support system for you! Published by the Finance InstituteTM

2 Understanding Your Opportunity Factoring represents just one of the many opportunities within the cash flow industry. Both businesses and individuals are looking for alternate forms of financing. Those who become educated and choose to be innovative will prosper. The need for alternative financing will continue to escalate for many reasons, including the following: 1) The economy continues to operate based on debt. Every debt creates a stream of payments, which in turn creates an opportunity in the cash flow industry. 2) Cash flow income streams provide an investment alternative for investors seeking better yields on their capital. Investors who either fear a decline in the stock market or dislike the daily management of their investments can earn significant returns in the cash flow industry with little invested time. 3) The cash flow industry is gaining visibility in the financial services marketplace. With increased visibility, more businesses and consumers are becoming educated about cash flow options. The more people learn about their options, the more people will begin looking for consultants and buyers to turn their income streams into cash. The opportunity is real. Funding sources are standing by and anxious for deal flow. Your success is in your hands. Good luck! 2

3 The History of Factoring Recorded history reveals that the concept of turning future payments into cash ( or cash equivalents) dates back thousands of years. Much like today, the need for liquidity, or cash to pay everyday expenses, has always been a great need. Think of the days when merchants would travel the seas in search of various treasures. Ships would be filled with those in need of food and necessities to survive. Financiers offered payments against future rewards as a means to earn a return on their investment. This financing was an integral part of the success in establishing world trade. Thus, the concept of factoring was born dating back some four thousand years. Prior to the 1980 s, factoring was used primarily in the garment, textile, and furniture industries typically only available to larger companies. Entrepreneurial funding companies, coupled with the creation of a consultant (broker) network, changed all this in the late 1990 s. Factoring is now a widely-accepted financing alternative. Due to the credit crisis and economic meltdown of years gone by, factoring has quickly become one of the alternative financing industries tools of choice. Today, businesses are holding onto their cash for as long as they can. This means that suppliers to these businesses are becoming stretched out with regard to payments. 3

4 The Facts A recent study conducted by the Credit Research Foundation found nearly 80% of North American companies report that the economy has had a direct negative effect on their business with a majority citing tightening cash flow and a slowdown in customer payments! In addition: 33% say the financial crisis is straining their availability to gain working capital 67% report that they are experiencing a general slowdown in customer payments 68% say their customers are experiencing tightening of bank financing 67% report tightened A/R collections Companies that were accustomed to receiving payment on their invoices in 30 days are faced with the reality that the payment cycle is now surpassing 60 days or longer. The national average for invoices to be paid across North America is a whopping 73 days! The trickle down effect of this is tremendous. Without the needed cash flow, companies are forced to make tough decisions. Employees are being let go (no money for payroll), supplier payments are delayed (resulting in delayed or cancelled shipments for future orders), delaying payment of operating expenses (negatively affecting the company s credit history which will adversely affect their purchasing power), payment of taxes are delayed (resulting in judgments and tax liens) and the list goes on. 4

5 What drives the economy? Is it interest and/or Mortgage rates? No, they are currently hitting record lows and the economy is still bad. Simply said, when consumers spend their money, the economy thrives. Therefore, the question is: why are consumers choosing to save their money as opposed to spending it? 5

6 Understanding the trends We have all heard the term Baby Boomers. Baby now seems to be a misnomer as over 10,000 boomers turn 65 each day and this trend will continue for the next 15 years! So, how does this have an effect on our economy? Statistics show an individual s highest earning capacity is between the ages of 35 and 55. Spending is typically concurrent with earnings the more you make, the more you spend. The opposite is true as well. The less you make, the less you spend. Since the boomers are earning less, they are spending less. In addition, the unemployment rate is higher than it has been in decades. The average unemployed person has been out of work for at least 9 months. Finally, throw the real estate and stock market disasters into the mix and you have the recipe for an economic collapse. The demand for credit has shrunk amongst consumers in spite of the stimulus plan and bank bailouts revealed the single biggest drop in the past 60 years for demand for credit and still remains low today. People and businesses are more concerned with hunkering down and paying their debts than they are with borrowing for growth and expansion. Banks are circling the wagons in an effort to stabilize their existing loan portfolios, and are turning down loan applications at an unprecedented rate. 6

7 So what are we left with? Our economies are driven by small business. Banks are not lending and we are witnessing the potential demise of the small business - As small businesses decline, employment declines and consumer confidence tumbles. However, there is a solution! When cash flow is tight, where do companies turn? Traditionally, this answer has been to banks. Pick up today s paper, listen to the news, research the internet and you will see that banks are NOT the solution. Banks are looking to the federal government (remember the stimulus plan) for help in overcoming astronomical losses due to loosened credit policies in the past. Their directive is to protect their existing portfolios, while becoming extremely conservative in providing new loans (if any). Factoring has now become the financing tool of choice. And in many cases the only choice. 7

8 So, what is factoring? The definition of Factoring is simple: The purchase of business to business (B2B) or business to government (B2G) accounts receivable (invoices) for products delivered or services that were rendered in the past, at a discount. Factoring is NOT A LOAN and NO INTEREST is charged. It is simply the discounted purchase (sale) of a company s non performing asset (accounts receivable an invoice that is paid over time) 8

9 Is factoring just for a few select industries? Factoring related transactions are somewhat vast. By definition, invoices must be from one business to another business or, from a business to the government. With this in mind, the number of potential prospects is HUGE! At the time of publishing this workbook, there were over 55 million small businesses scattered all across North America (United States and Canada). This number is sure to increase due to new start up companies that have sprouted up recently, mainly as a result of those individuals that have been downsized and subsequently have started their own businesses. Ask yourself this question: How many businesses do you know of that provide a product or service to another business or the government? Now ask yourself: How many of those businesses are getting paid in over 30 days? 45 days? 60 days? 90 days? Since just about everything in a factoring transaction is centered on an invoice, let s see what a typical invoice may look like. 9

10 10 2%10/net 30

11 There are a number of components that make up an invoice. Let s quickly highlight and describe these components. Bill To: Identifies the customer or the payee information in the sales transaction Description: Identifies the products that were manufactured and shipped, products that were redistributed or services that were rendered. Quantity: Identifies the number of units of the products that were shipped or services that were rendered. Unit Price: Is the individual price of each product that was shipped or the services that were rendered. Line Total: Is calculated by multiplying quantity times the unit price. One of the most important components that make up an invoice is the TERMS of payment. Typical terms in business are: 2% 10/net 30 days which means if the customer pays for the invoice within 10 days they will receive a 2% discount off the face (total value) of the invoice. If the customer pays for their invoice after ten days, they are required to pay the total (face value) of the invoice. This is fundamental for the factoring industry. The longer the terms (time to receive payment), the larger the ultimate burden on cash flow. 11

12 How Factoring Works First, let s define the participants in any factoring transaction. Payee (Seller of invoices) The Payee, also referred to as the Seller, is the company that has manufactured a product and shipped that product or rendered a service. In the factoring process, we call the seller a prospect/client. That company will now create an invoice for a sales transaction that has taken place. Buyer (factor) The buyer (factor) is the company that supplies the capital in a factoring transaction. The factor is commonly referred to as a funding source that buys invoices at a discount. Payor (also known as the debtor or customer) 12

13 The payor is a company (customer) or government agency that makes payments against an invoice of the Payee, the seller (prospect/client). The factoring process begins when a Payee (client) is introduced to a Buyer (Factor/Funding Source). The Buyer then makes their funding decisions based on whether or not the Payor has the credit strength to pay for the invoices and how long they typically take to pay for their invoices. Factors will also consider its ability to verify the delivery of products and/or services rendered to a Payor. The opportunity to make money in the factoring business is two fold. 1.As a Broker/Consultant Finding a Payee (company) that is in need of cash flow to assist them in growing their business or alternatively, needed to survive. 2.As an Investor or Funding Source Buying the payment or stream of payments (invoices) from a Payor (Customer) to a Payee (Company). 13

14 Two Key Disbursements There are two key disbursements that are associated with a factoring facility. The first disbursement is called an Advance and the second disbursement is called the Reserve. Advance the client receives up to 90% of the face value (total) of the invoice when the invoice has been purchased by the factor. The advance rate depends on the risks involved with the transaction the greater the risk, the lower the advance. Reserve the client receives the reserve balance once the customer has paid for the invoice less the discount fee charged by the factor. For example - if the invoice is $1, and the Advance has been set at 75% by the factor, then the Reserve would be 25% (100% of invoice - 75% = 25%). The reserve is released once the invoice has been paid by the customer (debtor). 14

15 Factoring Terms To help you better understand how Factoring works lets define some of the most commonly used terms that are used in a Factoring transaction: 1. Invoice - a business document defining the amount owed for a service rendered or product sold and delivered. An invoice can also be referred to as a legal document, or a short term note to the customer, when terms are listed on the invoice. 2. Accounts Receivable - an invoice (or group of invoices) that remain unpaid and is due to be payable in the future 3. Due Diligence- The process of evaluating the risks involved in funding a client. In factoring, this typically includes a number of actions including: review of financial statements, credit reviews on the clients customers, and payment history on past invoices. 4. Prospect A company in need of improved cash flow that is seeking alternative financing options 5. Client Once a prospect commits to a funding source (typically by signing a legal document called a Factoring and Security agreement), they become a client. 15

16 6. Customer/Debtor the entity that has received a product or service and is now indebted to the client for payment. In most alternative financing scenarios, this must be a credit approved business or some form of public entity (government) 7. Factor a commercial entity that provides alternative financing options to various business. Factors specialize in purchasing business-to -usiness or business to-government accounts receivables at a discount. 8. Consultant typically a trained individual that acts as a match maker in a factoring transaction. Simply put, the consultant finds and introduces a prospect that is in need of financing to a funding source, such as a factor. 9. Discount Fee - the fee charged by the factor. The discount fee is typically charged on the face value (total) of the invoices and increases as the invoice ages. 16

17 How do factors make money? When entering a discussion on how a factoring (funding Source) company makes money, you must first embrace the idea that a factor is not a lender. This is a grave error perpetrated by many who not only enter the field, but also by those companies who are considering using factoring as a tool to accelerate cash flow in their business. Why is this important, you ask? It is important for a few reasons: Annual Percentage Rate: We are all conditioned to believe the only way to get money is through a bank. After all, our first account was a passbook savings account at a bank. When we grew older and it was time to get a checking account, we secured this at a bank. To further the example, we ask: Where does the business owner turn to get a business checking account or a loan for his/her company? One thinks that the only place to get these things is at a bank. Therefore, it is safe to assume that whenever you are talking to a company about financing, they will equate you and in this case, factoring, to a bank. We must emphasize again that banks charge interest on money they lend while Factors buy invoices at a discount fee. No Lending, Different Regulations: Since factors are actually purchasing assets at a discount and not lending money, they are not regulated in the same way that banks are. This flexibility allows factors to pursue funding opportunities that are typically avoided by the banks (eg new start ups, companies with historic losses or liens against them). 17

18 When a bank says No, why will a factor say Yes? Said another way, why would a factor fund a company that a bank won t lend to? When a bank makes a loan to a company, they are relying on that company s ability to pay back the loan. They look to hard assets like property, equipment, inventory and cash as security in the event the company defaults on the repayment of the loan. When a factor purchases an invoice at a discount, they are simply relying on the client s customer/debtor to pay the outstanding invoices, in full. To summarize, factors prosper by taking a different approach to commercial financing. Banks are making their credit decisions based on the strength of the borrower s assets. Factors make their credit decisions based on the credit strength of the Borrower s customers. 18

19 How do factors protect themselves against non payment (or short payment) of invoices? The following is an example to demonstrate how this works: Invoice Amount: $1, Amount Advanced to Client = 80%: $ Amount Held In Reserve = 20%: $ Days Later: Amount paid by client s customer: $1, Advance amount back to factor: Discount Fee = 2.5% of invoice: Amount rebated to client: $

20 During the transaction, the amount held back in Reserve serves to protect the factoring company against any potential credit offsets taken by the client s customer (debtor). If there were a credit taken by the client s customer, that amount would be subtracted from the reserve before rebating the remaining monies to the client. As you can see, in total, the client received an advance of $800 and a reserve rebate of $175 for a total of $975. The factor received a discount fee of $25 for the service. Now imagine a factor managing hundreds of thousands of invoices at any given time, all of which are being purchased at a discount. The yield can certainly add up for the factor! Best of all, the client is getting the use of working capital which will make them stronger. A stronger client creates more invoices. In many cases that client will grow and factor all of their invoices. 20

21 How Do Factoring Consultants (YOU!) Make Money? The factoring industry is unique in that there Genie are Cloud several ways to get involved in the industry and make money. You can participate on any level, depending on your comfort level. Below are the most common ways to earn income: Consultants earn a residual fee or commission! As a consultant (broker) you will spend most of your time Finding and screening prospective small - to - medium sized businesses that are in need of accelerating their cashflow. Once you have identified a good prospect, you can now consolidate the initial information (asking them to complete a short client profile). The factor will then take over and complete their due diligence. When the transaction closes, you will earn a residual fee. The great thing about being a consultant in the factoring industry is you continue to earn a fee or commission (residual) each and every time a factor buys invoices, the customer(s) pays for the invoice and the factor earns a fee. You continue to get paid your commission for the length of the relationship between the factor and the business client. This model applies to most, if not all factoring transactions. Typical commissions paid in the industry are up to fifteen percent (15%) of the factor s earned discount fee (the TFI pays 15%), depending on the type of transaction, the size of deal, and the fee the factor earns (As a consultant, you can stay involved in the transaction from start to finish or you can simply refer the transaction and let the factor perform the rest of the work.) After you accumulate money as a consultant, you may decide to factor some of your own transactions. However, we recommend that you only do this once you ve become familiar with all risks involved in managing a factoring portfolio. 21

22 The Finance Institute s FEES Principle What are the steps to funding a factoring prospect? Everything begins with YOU, the "Consultant". Understanding the FEES principal and the steps involved are crucial to closing deals. Similar to building a sturdy house, your factoring business must begin with a strong foundation. This foundation must be reinforced through proper education, training and support. Reading this Ebook and watching our video modules training series are a good first step. It is crucial that you understand the FEES principle as it creates the building blocks to success in this dynamic industry. Let s now break down the term FEES and show you how this relates to your success in this industry. F (F)ind them As a consultant your core mission is to find a business (prospect) that is need of cash flow to help them grow or in many cases survive. 22

23 E (E)xpose them After you have found your prospect, you must learn how to expose them to you, your knowledge and the benefits of factoring. You must show them what is in it for them once they do business with you, and, ultimately, begin to factor their invoices. E (E)ducate them After you have found and exposed your prospect to the concept of factoring it is time to educate them about the features and benefits of factoring and how factoring can make a difference in their business. Learning to harness the power of the internet, taking advantage of all the free technology that is available at the click of a mouse can help you find, expose and educate your prospects. Developing sound communication skills is vital to a consultant s success. Knowing what to say, when to say it, and how to say it will make you look like a seasoned professional and is critical to your success. That is where our video module training series comes into play. S (S)upport After you find, expose and educate you need the support and expertise of our member services advisor and the factor to structure the deal. Structuring and funding your deal is when the factor begins to earn FEES. 23

24 The Factoring Process The Factoring Process works synergistically with the FEES Principle. There are five steps associated with the factoring process. It is important to know how each party fits into the process and the responsibly of each party in fulfilling the necessary steps in the factoring process. The Factoring Process 1. Find a Prospect 2. Gather Information 3. Submit the Information to the Factor 4. Factor Closes the Deal 5. Maintain Client Contact As the consultant, you are responsible for Finding a prospect. After you have found the prospect, your responsibility simply shifts to exposing and educating the prospect (remember the FEES Principle). 24

25 The second step is Gather Information. Typically you, the consultant (broker) and/or the member services advisor, are responsible for fulfilling this step. Gathering information begins with communicating with the prospect. We have prepared a proven script for you which is logically called the Gathering Information Script that includes the five hot questions to always ask - this will assist you in compiling some preliminary items of information, i.e. a short client profile (you will receive your own copy of a standard client profile and the Gathering Information Script when you become a member of the Finance Institute). We also will require a copy of a customer list, and accounts receivable aging report but, don t worry one of our member services advisors will assist you with that... Remember, one of the ways in which the factor makes their credit decisions is based on the creditworthiness of the customer. The accounts receivable aging report will help to provide a snap shot as to how the propect s current customers are paying their invoices. On the following page you will find an example of an Accounts Receivable Aging Report 25

26 You are welcome to participate in each call with your prospect and our member services advisor if you wish. As a matter of fact we encourage you to do this as it will expose you to how structuring a transaction takes place. Assuming both parties agree that factoring makes sense for the prospect, the member services advisor will package the information and submit to our group of nationwide factors (for them to quote on factoring fees) and step three will take place (after the prospect has reviewed the proposals and decided which factor they will use) Due Diligence Review. 26

27 Upon the completion of the due diligence process and approval from underwriting the file moves to step four. Step 4: The Deal Closes and the funding process will begin. Step 5: Maintaining Client Contact Is an important step in the Factoring Process. As the consultant we suggest that you should always Maintain Client Contact as the client s needs may change. For example: they may require equipment leasing, purchase order funding, insurance etc. Or, better yet, they may want to refer a new prospect to you! A happy client is a great referral source. By maintaining client contact, you will be in position to benefit from other income opportunities. 27

28 The Communication Process There are three core processes that take place in implementing a factoring service between the prospect and the factor (you, the member services advisor, the factor and the client) all of which we cover in this Ebook: The FEES principle, the factoring process and the communication process. It is important that you understand how these processes work together in implementing a factoring relationship. For you to find a prospect, you actually have to implement the first three steps of the FEES Principle. Years ago, sending out a direct mail piece to a large targeted list was an effective strategy to get business. Attending a trade show was a popular strategy to reach a business audience. Telemarketing or dialing for dollars was also an accepted form of marketing. Today people learn, gather information, communicate and make decisions in an entirely different way. We recommend implementing a strategy called Attraction Marketing. This involves learning to Harness the Power of the Internet! If you utilize the power of the internet, you will create tremendous reach for your business. We like to compare Marketing to Fishing, the more lines that you have in the water in any given time the chances of you catching a fish go way up. By learning to harness the power of the internet you can have multiple lines (social media, capture pages, blogs, webinars, cultivating referral sources etc.) exposing and educating your prospects ( fish ) about factoring. 28

29 The next step is to educate your prospects on the benefits of factoring. This brings us to the communication process. Developing your Genie communication Cloud skills will be vital to your success. It is important to understand that successful consultants have become proficient in learning what to say, how to say it and when to say it (via our proven script). Ultimately, adapting a consultative mindset versus a sales mindset. 80/20 Rule One of the unique things about this industry is that you really don t need to sell anything. Keep in mind that your product is money and everyone wants or needs more of your product. Therefore, you simply need to educate your prospects on how they can obtain your product (money). When Selling one often speaks 80% of the time and listens just 20% of the time. We reverse this in the consultative communication process as one will listen 80% of the time and speak just 20% of the time. The way you achieve this ratio is by asking questions and taking good notes. There are five basic questions that you should always ask when speaking with your prospect for the first time - when you enroll as a member of the Finance Institute you will receive this information. 29

30 Framing the Conversation Knowing what to say and when to say it is essential in the consultative communication process. By learning to frame a conversation, you will create an agenda for the conversation, which ultimately will give you greater control. It is not just about the information that you are going to present during your conversation, it is how you say it, when you say it and why you say it! As a consultant (member of TFI), we will show you how to always control the conversation and guide your prospect through a simple process that will answer their questions before they actually begin to ask you questions. Remember the objective of framing is to assume control lay out the guidelines for the conversation and position yourself to be the first party to ask the first question. Having a strong CTA (Call To Action) is vital in having your prospects complete the short client profile. As a member of one our training programs you can participate in role playing sessions (with a member services advisor) that help you develop the skills to deliver a proven script (Gathering Information Script that you will receive) and burst out on the scene like a seasoned professional. 30

31 Introduction to Marketing Our definition of efficient marketing is finding the most amout of qualified prospects in the least amount of time for the least amount of money As business people, we are taught that to be effective at marketing, you must (A) pick an Industry (B) Identify all the companies in that industry and (C) sell your product by sending a message to all companies in that target. Ugh! Side note: The people who tell you the above are also the same people who will tell you to make 100 cold calls on the telephone per day to be successful. Banish the thought!!!! In the past, sending out a direct mail piece to a large list was an effective way to get business. In the past, attending a trade show was a sure bet to reach a business audience and of course telemarketing was a popular strategy as well. Today, there is a paradigm shift in how people make their purchasing decisions. It is all about working smarter not harder, learning to harness the power of the internet is what our proven strategies are all about. As we mentioned previously, marketing is like fishing, the more lines you have in the water the greater your chances are of catching a fish. If you learn to take advantage of all the free technology at your disposal i.e. social media, blogs, building referrals sources, your contacts etc. you will create tremendous reach for your business. Social media in itself is a captivating medium and is always changing with new strategies and processes. It is our opinion the companies, brokers/consultants that don t learn how to utilize social media and the power of the internet will be left behind. 31

32 Marketing has become more of a training function then a sales function. Learning to attract your prospects and referral sources is what Attraction Marketing is all about. All of our training programs are loaded with tips and techniques to find and attract prospects and referral sources to you. To become truly successful as a factoring consultant (broker), you must ask yourself what both the prospect and the factoring company are trying to gain through a potential relationship together. For example, Factor s want to purchase invoices that are from one business to another (or the Government), and that the payor of the invoice(s) is credit worthy. With that thought in mind, some consultants (brokers) successfully employ what we call a Reverse marketing strategy Find the good debtors and educate their suppliers about factoring! The formula will look like this: IF the factors are simply looking to buy invoices paid by strong debtors; and IF you find a good company that would be approved by a factor as a good Payor; THEN any company selling goods and services to that good payor is pre-approved for funding. In summation, the TFI will help you implement an Attraction Marketing strategy or target market for your marketing strategies. Always remember that if you begin with the end in mind, your approach will win you a near 100 percent close ratio and the efficiency you are looking for in a successful marketing strategy. 32

33 Cross Border Factoring We wanted to bring to your attention a specific niche opportunity that is rapidly becoming a great revenue source for consultants and factors across North America It s called cross border factoring, and here is how it works: Cross Border Factoring takes place when a business is located in the United States and sells to customers in both the United States and Canada, or when the business is located in Canada and sells to customers in both Canada and the United States. In both scenarios the business wants to factor some or all of their customer s invoices. Not all factoring companies will purchase invoices in both countries due to the complexities involved with these types of transactions, eg: usury laws, currency and exchange rates etc. It is, therefore important that you utilize the services of a cross border factoring company that is experienced in buying invoices in both countries. The Finance Institute is affiliated with a number of cross border factors. 33

34 Targeting a Profitable Market Successful marketing begins with what we call a marketing mindset. The marketing mindset is the precept that Business is not about business; business is about marketing. A business with a weak product or service and strong marketing program almost always surpasses (in revenues) a business with a strong product or service and weak marketing program. If a company has a strong marketing program, it can always make improvements to its product or services along the way. People who demonstrate a strong marketing mindset recognize that the entire success or failure of their business hinges on marketing. As a consultant your livelihood will depend on your marketing strategies, plans and skills. You cannot earn income simply by showing up every day and doing your job. Marketing is the process whereby you identify and communicate with a qualified prospect. It is identifying exactly which prospects you want to reach, then communicating your message successfully to that audience. No matter how much you may know about the technicalities of transacting factoring deals, you cannot close a transaction and earn a fee or commission if you don t have a prospect. Taking this a step further you should also consider the size of your marketing budget and the time you have available to put forth towards your consulting career. Therefore, again, a good definition for Marketing is finding the most amount of qualified prospects in the least amount of time for the least amount of money! 34

35 Factoring Case Studies Here are some real life case studies that will serve to better illustrate the benefits of factoring. Health Care Staffing First, we must define the players in the transaction. Payee Health care staffing company providing nurses to hospitals on a temporary employment basis (client) Buyer Funding Source (factor) Payor Hospitals (customer) Background: The health care staffing company sought out a consultant (an individual just like you) after being turned down by a local bank for funding. The consultant introduced and educated the staffing company on the benefits of factoring. The Current situation: Client was providing temporary nursing services to various hospitals. Client s major operating expense was in meeting the payroll demands of its temporary workforce (nursing) on a weekly basis. Client was receiving payment on invoices to hospitals in 60 days. However, the client had the ability to cash flow these expenditures out of current working capital. 35

36 Client received a phone call from a very large hospital informing them they had been awarded a contract for 50 nurses to be employed 40 hours per week. The hospital was mandating 60 day payment terms on all invoices. The Math: Client (health care staffing company) pays its nurses (on average) $24.00 per hour. Client charges it s customers (on average) $36.00 per hour for hours worked. Hospital pays its invoices for services provided by the client in eight weeks or every 60 days. Client must pay nurses weekly for hours worked. In order to fulfill this new contract, the client is faced with the reality of having to come up with $384,000 in cash to cover the payroll burden: 50 (nurses) X $24.00 (average hourly pay) x 40 (hours worked per week) x 8 (number of weeks for hospital to pay) = $384,000. The Issue - The Bank: Client approaches the bank to request a loan for $500,000. Bank declines the loan due to insufficient collateral only asset is accounts receivables. In addition, the health care staffing company had only been in business for 16 months and did not have enough financial history. 36

37 The Solution: Client is introduced to factor. The Factor reviews the credit history of the payor (hospital) and determines it to be a solid credit risk. The Factor agrees to advance 90% against invoices purchased. Keep in mind, the $24.00 per hour was not the amount that the client charged the hospital. If it were then the client would not earn a profit. In this transaction the client charged the hospital $36.00 per hour, so the client earned $12.00 per hour (gross profit) for each hour the nurses worked ($36.00 amount charged to hospital - $24.00 amount paid to each nurse = $12.00) 50 (nurses) X $36.00 (average hourly pay) x 40 (hours worked per week) x 8 (number of weeks for hospital to pay) = $576,000 The Factor will Advance (first key disbursement) 90% against invoices created: $576,000 X 90% = $518,400 Note: Keep in mind that Factor will fund weekly based on verified hours worked per nurse. This figure provides an aggregate amount that is funded over the 8 week period. Since the payroll burden is $384,000, The Factor s advance of $518,400 is more than enough to cover the payroll and provide additional working capital over the eight week time period. The client now has additional working capital to source out new contracts, and to help meet fixed costs like rent, telephone, utility payments, etc. A win-win situation! 37

38 Sleep Perfect Plus Situation Sleep Perfect Plus (SPP) is a mid-sized Durable Medical Equipment Company (DME) specializing in sleep disorder equipment for improving sleep for patients with sleep apnea or other sleep deprivation diagnoses. DME is one of more than 18 segments in the healthcare industry that bill third party payors (eg. Medicaid, Medicare or major insurance companies) for patients the agency treats. SPP had annual revenue in 2011 of $814,000. The DME agency was started in 2006 and had experienced 20 percent annual growth since then. SPP had been profitable it s first two years of operation, but in 2010 it lost $463,000 because of mismanagement as well as poor billing and collection problems, that are somewhat common in medical concerns. Their claims were submitted incorrectly and subsequently denied by many of the payors. To worsen the problem, SPP was not organized sufficiently to resubmit the claim in a timely fashion. Therefore, the company was losing revenue as well as being overstaffed with too many operating sites. At the end of 2010, Harold Green, President of SPP, hired a new chief financial officer that also served as the operating head for the company. The new CFO, Richard Baker, began making changes immediately and simultaneously implemented a new marketing plan that he forecasted would triple SPP s business. By the end of 2010 the billing and collecting problems were corrected, three unprofitable sites had been closed and business was beginning to increase at an alarming rate. 38

39 It was alarming due to the fact that the company s working capital was insufficient to meet the growing demands created by this recent success. Richard was concerned that if he began turning down referrals he would lose the referring sources permanently. He needed working capital desperately. Richard did not have time to find additional investors and Harold Green was reluctant to give up control of the business which investors might require. The bank was not an option. SPP had a $200,000 line of credit (LOC) with a local bank and the bank was unwilling to increase the line because of the losses the company had incurred in In addition the LOC was strangling SPP because it was collateralized by filing a lien on all of the assets of SPP. The bank was unwilling to subordinate to any other lender rendering it impossible for SPP to gain additional working capital. The Solution Richard Baker has been introduced to Medical Claims Factoring by an Independent Consultant just like you. When Rich submitted SPP s documents for underwriting, it was a challenge. The documents reflected the story with only projections for 2011 being rosy. SPP s accounts receivable summary had 20 third party payors. The accounts receivable t otaled $1,122,081 with $367,365 aged greater than 90 days. This 32% of total AR was reflective of the problems that Rich had inherited. The positive finding was that SPP s largest payor was a state agency that contracted directly with SPP. That contract was in addition to Medicaid and payment on that contract was within the 90 day eligibility period for medical receivables. 39

40 The next challenge for underwriting was to determine the net collectible value (NCV) of the accounts receivable in order to value the new claims going forward and to be able to fund the initial advance from the existing receivables. Medical claims are submitted to the payors on standard forms with codes for the procedures and medical information to justify the charge (known as usual and customary rates (UCR)). The UCR is generally regarded as gross charges or gross revenue. The amount the payors remit is generally referred to as net revenue. Advances are made on net revenue or the historical NCV. NCV may be referred to as ENR (estimated net revenue) because it is only an estimate of what is expected to be paid and in never 100% accurate. The only certainty we have is that the gross charge on the claim will not be paid. Our next step was to complete an analysis of the historical collections keeping in mind that SPP had a history of billing and collections issues. When AR analysis was complete the NCV ranged from 15% for the lowest payor and 77% for the highest with a weighted average of 53% of charges being collected. The best news was the highest payor was through the state contract which had the most revenue which helped increase the weighted average. The credit committee disallowed all of SPP s AR greater than 90 days and agreed to an initial advance rate of 75%. The initial advance of $400,000 allowed Rich to pay off the bank and have $200,000 in working capital to meet the increasing demands of his successful marketing program. 40

41 The Results The success was outstanding. Here is a comparison of the 2009, 2010 and 2011 financial statements. Note: 2009 was prior to SPP factoring their claims. Once Rich had the necessary working capital, he built an extremely profitable business with substantial margins. Without the working capital, SPP would have most likely failed. In Conclusion Medical claims factoring is one of the fastest growing segments in the factoring industry. Great prospects to pursue include: Individual or group practices (physicians) Small rural hospitals up to 100 beds Imaging, ambulatory surgery or rehabilitation centers Durable medical equipment providers 41

42 Delta Components Situtation Delta Components, Inc. ( Delta ) is a relatively small distribution company located in Reston, VA. Delta currently has just over $500,000 in revenues and during the past year, Delta enjoyed significant sales growth. While most business owners would be thrilled to experience the growth that Delta has, Ron Cotton (Principal), was very concerned that his company s cash flow status would be unable to keep pace with its sales growth. The majorities of Delta s customers are strong financially and have a history of paying their invoices on time. However, on time these days means 45 to 60 days. Delta pays their employees every week and they must pay their vendors in 30 days. The discrepancy between the time Delta needs to pay their employees and vendors has, and will continue to create a cash flow problem for Delta. In an effort to meet his internal cash flow needs, Ron has delayed vendor payments resulting in placing his purchasing power at risk. This could result in his vendors implementing more restrictive payment policies (basically, Delta would need to pay faster, if not up front, in order to receive future shipments from the vendors). This lack of cash flow has also caused Ron to take a pass on a number of significant business opportunities. In Ron s mind, it did not make sense to just take on new orders if it meant increasing his inability to pay his vendors on time, and most importantly, hindering his need to pay his employees on time. To better illustrate Delta s current position, review the following table: 42

43 Delta Components, Inc. Current financial position (without factoring) Yearly Sales $500,000 Variable costs (70% of sales) $350,000 Fixed Costs $50,000 Total Costs $400,000 Gross Profit/Loss (Sales - Costs) $100,000 Note: Ron has calculated that he has lost close to $200,000 in sales opportunities due to the fact that he did not have the cash needed to pay his vendors on time, nor to pay his employees, which were both needed to fulfill on these commitments. Ron was being forced to make a decision that would dictate the future success or failure of Delta. Find a way to increase the cash flow within the company or continue to turn down future sales/growth opportunities. Ron reviewed his options for improving his cash flow. 43

44 First, Ron reviewed the options that were available to him without seeking financing: 1. Demand more strict payment terms from his customers 2. Increase the sale price of his products 3. Negotiate more conservative payment terms to his vendors 4. Reduce employee cash burdens (eg... insurance, bonus, wage increases or possible layoffs) 5. Delay his payment of payroll taxes After much thought, Ron came to the following conclusions: Options 1 and 2 were not possible. Demanding his customers to pay their invoices faster was a recipe for disaster as his competitors were offering more liberal payment terms now in an effort to induce his customers to conduct business with them. Raising his prices would position him as unattractive option to his customers. Ron was in a very competitive business, and his customers would simply choose to buy their products from another, less expensive resource. Option 3 was not possible. His vendors had already placed him on credit hold. Asking them to now give him more liberal payment terms would be counter intuitive. Option 4 was not possible: Simply put, if Ron were to increase his business, he would need all his employees, if not more, to work for him. In order for him to either keep current or attract new employees, he would have to offer competitive wages and benefits to bring them to Delta. 44

45 Option 5 was an option, but, a potential death blow to Delta. Avoiding the payment of employee tax burdens to the government is never a good long term solutions. Although the impact of not paying the taxes will result in an immediate improvement in cash flow, the long term implications could amount to tax liens and high financial penalties due. If Ron was unable to recover cash by making internal changes to his business, he must now look to outside financing to help him. Ron viewed his outside financing options as: 1. A line of credit with a bank 2. Offering ownership (equity) in his company, in exchange for working capital 3. Factoring Delta s accounts receivables It is necessary to keep in mind that while Ron was considering all options, he was losing orders (daily) with potential customers that may never return. Ron knew that a line of credit with a bank was not a valid option, as he attempted this in recent memory and knew that he did not have the collateral needed to secure a loan. Ron had been approached in the past by a few potential investors, but this option came at a very high price, as he would have to give up ownership and control of his company in exchange for cash. 45

46 Ron determined that an accounts receivable factoring line of working capital would be the best solution to help his company strengthen his company s financial position. This would enable Delta to now accept new orders and to pay both vendors and employees on time. In fact, the acceleration of cash into his business would put Ron into a position of strength with vendors in that he could now be in a position to negotiate early payment discounts. Ron negotiated a 90% advance with The Factor and a discount rate of 2.5% (per 30 days). Since Delta was now getting paid on average in 60 days, Ron budgeted a discount rate of 5%. Ron then reconstructed his financial statements by adding the following: 1. The 5% factoring discount rate 2. The projected $200,000 increase in new business 3. Supplier discounts offered for quick pay. 46

47 Delta Components, Inc. projected financial position (with Factoring) Yearly Sales $700,000 (Note: Increase of $200,000 from new orders) Variable costs (65% of sales) $455,000 (Note: 5% supplier discounts) Factoring discount fees (Note: 5% of sales) $35,000 Fixed Costs $50,000 Total Costs $540,000 Gross Profit/Loss (Sales - Costs) $160,000 Additional Profit of $60,000, or 60%! Therefore, by selling his invoices and ultimately giving a 5% discount to the factor, Delta gained 60% in profits - truly, addition by subtraction! 47

48 Join our Elite group of Alternative Financing Specialists Today! Our world-class on-line training program and support system have been designed to End the Isolation so many people experience when joining a new industry. As a member of the Finance Institute you are invited to participate in our Monthly Strategy Conference calls, E-learning On-going education sessions, Coaching programs, on-going support and Live retreats and power days. Whether you are a business professional, stay at home parent or an entrepreneur looking to supplement your income the Alternative Financing Specialist on-line training and support system will show you what to do on a daily basis to cultivate leads and develop referral sources both on-line and off-line. We leave no stone unturned receive priceless scripts, tips and techniques, replicating website and so much more to help you Realize your Opportunity. Invest in Yourself Invest in Your Future! Visit our website: Questions: info@thetfi.com Call us: (FUND) ext. 2 : 48

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