Transcript Presentation Title - Graber Associates

Sarsha Adrian
Senior Consultant
Graber Associates
TMANE Annual Meeting
May 5th 10:45- 12:00 Session 505
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Founded in 2002
Financial Services and Technology Markets
Experienced subject matter experts
Research, Marketing Strategy & Execution,
and Public Relations
Offices in Boston, Burlington, London, New
York
(C) Graber Associates LLC 2011
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Part of the trillion-dollar Cash Flow Industry
A simple, untapped channel of wealth
Factoring involves the buying and brokering
of a company's accounts receivables
In today’s credit-restricted market,
factoring is mainstream.
(C) Graber Associates LLC 2011
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Practiced for centuries
Romans sold promissory notes at a discount
Factors financed the new world
Today, $150 billion dollar industry
Better known in Europe than in U.S.
(C) Graber Associates LLC 2011
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Businesses sell accounts receivable (invoices)
to Factors for cash
◦ discounted price, based on level of risk
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Effective management of receivables
Boosts company profitability
(C) Graber Associates LLC 2011
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Merchants who accept credit cards
Payday loans
Both have different “clients” and
“customers” but concept the same
(C) Graber Associates LLC 2011
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Factors rates of return far superior to those
of traditional investment vehicles
◦ Unregulated business, can charge market rates
◦ Assume the risk of collection
◦ Factors must be aware of the creditworthiness of
their clients’ customers
◦ Those customers become the factors’ debtors
(C) Graber Associates LLC 2011
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Client (seller)
Customers (debtors)
Account receivable (invoices)
Advance (% of invoice paid to client)
Reserve (% of invoice held by Factor)
Discount Rate (% amount charged by funding source for
use of money)
Recourse / Non-recourse
Contract period
Fees (services, credit)
(C) Graber Associates LLC 2011
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Need immediate cash flow to fund growth,
make payroll, etc.
Smooth out cash gaps
Want to build up company cash reserves
Eliminate collection hassles
Don’t want more debt on balance sheet
Don’t want to dilute company equity
Can’t get or wait for bank financing
(C) Graber Associates LLC 2011
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Flexible and powerful strategy to improve
cash flow
◦ Remember the Time Value of Money
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Receivables can be monetized
60% of business’ cash is tied up in accounts
receivable (Payments)
Average days sales outstanding (DSO)
across all industries is 65 days
(C) Graber Associates LLC 2011
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Base discount for the first few days
◦ Initial 3%
Incremental discount for following days
 1% for every additional 10 days
Large factors also require application or
due diligence fees
 1% up front
 Also billing fees
(C) Graber Associates LLC 2011
Fees and Rates Calculation
Present Value of a Payment
(C) Graber Associates LLC 2011
Factor 1
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Advance 80%
Discount 3% for first 30 days
1% for every 10 additional days
Annual return = 3% x 365/30 =
36.5%
Monthly commitment for 1 year of
$100,000 = $3,000 per month
Discount / Advance = Monthly
Return on Advance amount ($80K)
= 3.75%
APR: 3.75% x 365/30 = 45.625%
Factor 2
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Advance 85%
Discount 2% for first 15 days
1.5% for every 15 additional
days
30 day discount 3.5% = $3,500
30 Day Return %
$3,500/$85,000 = 4.1177%
APR: 4.1177% x 365 /30 =
50.00987%
(C) Graber Associates LLC 2011
Large Corporate
and
130,000
Middle Market
$10+ Million
High End Small Business
$5 - 10 Million
121,000
Small Business
$1 - 5 Million
1.4 MM
Micro Business
$50,000 - $1 Million
6.2 MM
SOHO/ Self-Employed
Revenues vary
16.8 MM
(C) Graber Associates LLC 2011
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Many large factors service large corporate clients
◦ Metro areas: check the Yellow Pages
◦ Minimum commitment of $100,000 + per month
◦ GE Capital, CIT
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Regional factors
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Small local factors
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Web
◦ Riviera, Millennium, LSQ, Gateway, Bibby
◦ Independent investment businesses interested in shortterm financing
◦ New exchanges
(C) Graber Associates LLC 2011
 Spot Factoring
 Single invoices
 Online Factoring
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Lower rates
No minimums
100% cash upfront
Easy signup
No non-payment
insurance
 Small invoice amounts
 INZAP Factoring
 Facteon
 Auction Sites
 Receivables Exchange
 DebtX
 Business-to-Business
 TradePay
 Bank Solutions
 Asset-based lending
(C) Graber Associates LLC 2011
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Security Guard Company
Oil Well Service Company
Electronics Importer
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Provides security guards for large retailers
that have parking lots (Home Depot, e.g.)
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Locations in NY, NJ, PA, and MD
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Closely held
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$20 million in annual revenue (approximately)
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Business challenges:
◦ Started small - $20,000/month in sales
◦ HUGE initial growth curve – payroll was main
problem
◦ Could not access “traditional” financing (i.e., bank)
to handle growth
◦ Inexperienced management
◦ No administrative infrastructure
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Factoring Provided:
◦ Straightforward and fast underwriting approval –
5-10 business days at most
◦ Ability to fuel extreme growth curves – in this case
2,500% in year one
◦ Mailing and collection of invoices
◦ Cash posting of factored invoices
◦ Online, real-time reporting on account metrics
(turn, credit limits, ledger, etc.)
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Results:
◦ Cost of factoring started at about 4% of sales and is
currently at 2% of sales
◦ Cemented client’s reputation with large customers
◦ Fewer resources expended on unnecessary
infrastructure (employees, larger office space)
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Provides process for capturing more oil from
the well during production
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Family owned business
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Operates in TX, LA, AR and PA
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Annual revenue growing to about $30 million
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Business Challenges:
◦ Need to capture business by “being ready” when
called
◦ DSO runs approx 65 days – extreme cash flow
pressure
◦ Capital equipment intensive business
◦ Lack of good documentation for completion of
service
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Factoring Provided:
◦ Access to instant cash - zero down time between
jobs
◦ Solution to long DSO of 65 days
◦ Cash reserves to rent or purchase capital
equipment needed to complete jobs
◦ Streamlined document signoffs and invoice
submission
◦ Very positive unanticipated effect!
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Results:
◦ Cost of factoring started at 7% of sales and
decreased to 5% of sales
◦ Better relationship with customers resulted in
additional business
◦ Can focus on what they do best, rather than what
they hate doing – chasing invoices
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Imports consumer electronics goods from
China
Ownership diluted among approximately 100
investors
Customers are big-box retailers
Annual sales unpredictable – seasonal and
based on current market needs
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Business Challenges:
◦ Unpredictable sales cycle
◦ One PO could range from $100K to $3M
◦ PO financing and factoring needed to complete ontime delivery
◦ Desk, phone, and laptop the only “infrastructure” in
the U.S.
◦ Concentrated credit exposure
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Factoring Provided:
◦ Flexibility to accommodate wild sales fluctuations
◦ A partner with a PO finance company to complete
order
◦ Outsourced A/R management
◦ Credit approval
◦ Credit risk of customers
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Results:
◦ Cost of factoring ranged between 3% and 5% of
sales (depending mostly on DSO)
◦ Now able to execute on POs without PO financing
and factoring (“OPM”)
◦ Better assessment of credit risk
◦ Protection from credit risk
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Factoring is a financial tool – and like all tools
it has its place
Cost of factoring includes more than just
capital – there are other services involved
Risk tolerant (underwriting of client)
Quick
Limited asset filing
Short-term (6-12 months usually)
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http://www.factoringresources.org
http://www.factoringcompanies.org
http://www.americanfactoring.org/Links.asp
(C) Graber Associates LLC 2011
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Many more options
Increased competition has lowered rates
More flexible, shorter term contracts
More mainstream thinking
(C) Graber Associates LLC 2011
Questions?
(C) Graber Associates LLC 2011
Thank you!
Sarsha Adrian
Senior Consultant
[email protected]
(C) Graber Associates LLC 2011