Sarsha Adrian Senior Consultant Graber Associates TMANE Annual Meeting May 5 th 10:45- 12:00 Session 505
Transcript
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Sarsha Adrian Senior Consultant Graber Associates TMANE Annual
Meeting May 5 th 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 todays
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 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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Factor Basics 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
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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 Dont want more debt on balance sheet
Dont want to dilute company equity Cant 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 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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Given the choice between receiving $100 today or $100 next
year, the obvious choice is Today. Why? Inflation eats away at
purchasing power Delay - you cant put the money to work earning
interest or a return on investment Time Value of Money (C) Graber
Associates LLC 2011
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Factors Fees and Rates 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
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Present Value of a Payment Fees and Rates Calculation (C)
Graber Associates LLC 2011
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Factoring Examples Factoring Examples Factor 1 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 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%
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(C) Graber Associates LLC 2011 16.8 MM Large Corporate and
Micro Business $50,000 - $1 Million Middle Market $10+ Million
SOHO/ Self-Employed Revenues vary Small Business $1 - 5 Million
High End Small Business $5 - 10 Million 6.2 MM 1.4 MM 121,000
130,000
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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 Regional factors Riviera, Millennium, LSQ, Gateway,
Bibby Small local factors Independent investment businesses
interested in short- term financing Web New exchanges (C) Graber
Associates LLC 2011
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Spot Factoring Single invoices Online Factoring 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
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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.) Locations in NY, NJ, PA, and MD Closely
held $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 clients 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 Family owned business Operates in TX, LA, AR and PA
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 on- time 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)
Many more options Increased competition has lowered rates More
flexible, shorter term contracts More mainstream thinking (C)
Graber Associates LLC 2011