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Written by Gregg Elberg
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Wednesday, 30 May 2007 |
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Word Count: 1439 Accounts Receivable Financing- Don’t Worry, Be Happy
There is a reason why accounts receivable financing is a four thousand year
old financing technique: it works. Accounts receivable financing, factoring, and
asset based financing all mean the same thing as related to asset based lending-
invoices are sold or pledged to a third party, usually a commercial finance
company (sometimes a bank) to accelerate cash flow.
In simple terms, the process follows these steps. A business sells and delivers
a product or service to another business. The customer receives an invoice. The
business requests funding from the financing entity and a percentage of the
invoice (usually 80% to 90%) is transferred to the business by the financing
entity. The customer pays the invoice directly to the financing entity. The
agreed upon fees are deducted and the remainder is rebated to the business by
the financing entity.
How does the customer know to pay the financing entity instead of the business
they are receiving goods or services from? The legal term is called
“notification”. The financing entity informs the customer in writing of the
financing agreement and the customer must agree in writing to this arrangement.
In general, if the customer refuses to agree in writing to pay the lender
instead of the business providing the goods or services, the financing entity
will decline to advance funds.
Why? The main security for the financing entity to be repaid is the
creditworthiness of the customer paying the invoice. Before funds are advanced
to the business there is a second step called “verification”. The finance entity
verifies with the customer that the goods have been received or the services
were performed satisfactorily. There being no dispute, it is reasonable for the
financing entity to assume that the invoice will be paid; therefore funds are
advanced. This is a general view of how the accounts receivable financing
process works.
Non-notification accounts receivable financing is a type of confidential
factoring where the customers are not notified of the business’ financing
arrangement with the financing entity. One typical situation involves a business
that sells inexpensive items to thousands of customers; the cost of notification
and verification is excessive compared to the risk of nonpayment by an
individual customer. It simply may not make economic sense for the financing
entity to have several employees contacting hundreds of customers for one
financing customer’s transactions on a daily basis.
Non-notification factoring may require additional collateral requirements such
as real estate; superior credit of the borrowing business may also be required
with personal guarantees from the owners. It is more difficult to obtain
non-notification factoring than the normal accounts receivable financing with
notification and verification provisions.
Some businesses worry that if their customers learn that a commercial financing
entity is factoring their receivables it may hurt their relationship with their
customer; perhaps they may loose the customer’s business. What is this worry,
why does it exist and is it justified?
The MSN Encarta Dictionary defines the word worry as:
“Worry
verb (past and past participle wor•ried, present participle wor•ry•ing, 3rd
person present singular wor•ries)Definition: 1. transitive and intransitive verb
be or make anxious: to feel anxious about something unpleasant that may have
happened or may happen, or make somebody do this
2. transitive verb annoy somebody: to annoy somebody by making insistent demands
or complaints
3. transitive verb try to bite animal: to try to wound or kill an animal by
biting it
a dog suspected of worrying sheep
4. transitive verb
Same as worry at
5. intransitive verb proceed despite problems: to proceed persistently despite
problems or obstacles
6. transitive verb touch something repeatedly: to touch, move, or interfere with
something repeatedly
Stop worrying that button or it'll come off.
noun (plural wor•ries)Definition: 1. anxiousness: a troubled unsettled feeling
2. cause of anxiety: something that causes anxiety or concern
3. period of anxiety: a period spent feeling anxious or concerned…”
The opposite is:
”not to worry used to tell somebody that something is not important and need not
be a cause of concern (informal)
Not to worry. We'll do better next time.
no worries U.K. Australia New Zealand used to say that something is no trouble
or is not worth mentioning (informal)”.
Query: if a business is financing their invoices with accounts receivable
financing, is this an indication of financial strength or weakness? Query: from
the point of view of the customer, if you are buying goods or services from a
business that is factoring their receivables, should you be concerned? Query: is
there one answer to these questions that fits all situations?
The answer is it’s a paradox. A paradox is a statement, proposition, or
situation that seems to be absurd or contradictory, but in fact is or may be
true.
Accounts receivable financing is both a sign of weakness with regard to cash
flow and a sign of strength with respect to cash flow. It is a weakness because,
prior to financing, funds are not available to provide cash flow to pay for
materials, salaries, etc. and it is an indication of strength because,
subsequent to funding cash is available to facilitate a business’ needs for cash
to grow. It is a paradox. When properly structured as a financing tool for
growth at a reasonable cost, it is a beneficial solution to cash flow shortages.
If your entire business depended on one supplier, and you were notified that
your supplier was factoring their receivables, you might have a justifiable
concern. If your only supplier went out of business, your business could be
severely compromised. But this is also true whether or not the supplier is
utilizing accounts receivable financing. It’s a paradox. This involves matters
of perception, ego and character of the personalities in charge of the business
and the supplier.
Every day, every month thousands of customers accept millions of dollars of
goods and services in contracts that involve notification, verification and the
factoring of receivables. For most customers, “notification” of accounts
receivable financing is a non-issue: it is merely a change of the name or
addresses of the payee on a check. This is a job for a person in the accounts
payable department to make a minor clerical change. It is a mainstream business
practice.
Bobby McFerrin wrote and performed a song called “Don’t Worry, Be Happy” for the
movie “Cocktails” starring Tom Cruise. The song was a number one U.S. pop hit in
1988 and won the Grammy for Best Song of the Year. Here are the lyrics:
”Here is a little song I wrote
You might want to sing it note for note
Don't worry be happy
In every life we have some trouble
When you worry you make it double
Don't worry, be happy......
Ain't got no place to lay your head
Somebody came and took your bed
Don't worry, be happy
The land lord say your rent is late
He may have to litigate
Don't worry, be happy
Look at me I am happy
Don't worry, be happy
Here I give you my phone number
When you worry call me
I make you happy
Don't worry, be happy
Ain't got no cash, ain't got no style
Ain't got not girl to make you smile
But don't worry be happy
Cause when you worry
Your face will frown
And that will bring everybody down
So don't worry, be happy (now).....
There is this little song I wrote
I hope you learn it note for note
Like good little children
Don't worry, be happy
Listen to what I say
In your life expect some trouble
But when you worry
You make it double
Don't worry, be happy......
Don't worry don't do it, be happy
Put a smile on your face
Don't bring everybody down like this
Don't worry, it will soon past
Whatever it is
Don't worry, be happy”
The bottom line: “notification” should not be an issue in most situations
involving accounts receivable financing; non-notification factoring is another
option that is available for businesses concerned with confidentiality that meet
minimum credit standards for asset based lending. Bobby McFerrin was right:
“Don’t Worry, Be Happy”.
Copyright © 2007 Gregg Financial Services
www.greggfinancialservices.com
Mr. Gregg Elberg is a licensed attorney and licensed real estate broker. Gregg
Financial Services is a full service brokerage for commercial finance companies
and banks that fund B2B businesses. Mr. Elberg arranges funding from $25,000 to
$50 million per month at competitive pricing, and works to reduce your financing
costs as your company grows. For more information about GFS, please visit our
website:
www.greggfinancialservices.com
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