A company for which sale-leaseback of equipment worked particularly well was one entering the automotive industry as a tier one supplier. The process entailed long lead time between order and production. Much of this time was spent tooling up and investing in expanded staff and facilities. Naturally, the result was projected operating losses until this new business started. A conventional bank could not see past the months of anticipated negative cash flows.

An equipment lessor, however, could be much more collateral focused. The ultimate structure allowed the company to sell the equipment to the lessor for 100% of its cost and to lease it back for five years, returning it to the lessor at the end of the term at a reasonable rate of interest. If the company wished to purchase the equipment at lease end, the effective interest rate was significantly higher. But then again, the desire to purchase would mean that the new program had been successful, and that there would be plenty of profits to spend. In this manner, the arrangement reduced the risk to the company.

 

To understand how ABS came about and operate, we must look back more than 20 years to when the government decided to make residential housing affordable by making investments in mortgages attractive to investors, thereby increasing the availability of mortgage financing. The government guaranteed these loans, provided they met certain requirements. This allowed for the creation of pools of "conforming" mortgages that ultimately were guaranteed by the government. They became very attractive collateral for investors. These accounts receivables financing investment instruments are commonly known as GNMAs (Ginnymaes), FNMAs (Fanniemaes), and other more esoteric, less recognizable names.

This was the beginning of a very important trend in U.S. capital markets. Both lenders and investors realized that sometimes an investor is better off in terms of risk if he buys a pool of loans than if he lends money directly to the company that booked the loans. invoice factoring company
and account receivable factoring
and accounts receivable financing

Nowadays, investors invest directly in all kinds of grouped assets: mortgages, student loans, car loans, credit card receivables, leases, even franchise dues or insurance premiums. They do this by buying ABS, notes or bonds issued by a special purpose company, the sole function of which is to hold the receivables which are the assets that back the securities. ABS have become so much a part of our financial markets that, in 1993, more ABS were issued than corporate bonds.

These special purpose companies are hybrids: like banks and finance companies in the sense that they are interested only in earning interest on a financial transaction, and like factors in that they purchase receivables.

The ABS company, or accounts receivable loans securitization sponsor, typically takes some economic risk in the receivables. This removes from their accounts receivable software customers, albeit in different degrees, some of the account receivable factoring

risks of owning the receivables. This comes from the fact that a true business accounts receivable sale must have occurred between the seller and buyer and a legal accounts receivable manager requirement of a true accounts receivable loan sale is that the buyer take some of the accounts receivable loan economic risks associated with owning the receivables. Furthermore the financial accounts receivable factoring company reports due to the sponsor are minimal, since the accounts receivable finance sponsor generates the accounts receivable factoring company statistics needed and the account receivable financing transaction typically requires no covenants.

Freight factoring
account receivable factoring
Invoice factoring
Invoice factoring companies

 can help those firms that banks often find difficult to approve such as start-up companies whose growth outstrips cash.  The primary focus in invoice factoring relationship is the credit-worthiness of the customers being invoiced and the client’s ability to produce a quality product or service.   Simply put, if the business has an acceptable product or service that it provides to a creditworthy customer then the business is a candidate for factoring company account.

 

The fact is that most companies share a common dilemma during periods of rapid growth of incoming orders draining cash flow.  receivables factoring

 not only provides immediate cash but, efficient businesses also use it as a tool to increase profit margins:

 

Typically, as a result of the sale of accounts receivable, a small business funding provider receives a sum ranging from 50 percent to more than 80 percent of the expected value of the receivables upon closing of the sale. All or a portion of the remaining expected value of the small business investor

receivables is handled in one of four ways: as a (1) deposit in a reserve account that is controlled by the purchaser; (2) subordinated participation interest in the receivables that now are owned by the purchaser; (3) secured or unsecured claim against the amount that is to be collected by the purchaser; or (4) a combination of these options. In programs utilizing reserve account deposits, the amount received by the seller at closing plus the small business grants amounts that are deposited generally are equal to 97 percent or more of the expected value of the receivables.

running his commercial aerial photography business is somewhat akin to working without a net. Inconsistent customer demand, changing technology, and the need to rapidly expand into new geographic markets all make for an unpredictable commercial existence. "There is no small business ideas cookbook for a company like this, so we're guessing a lot," says Geis, 46, whose Idaho Airships Inc. also specializes in forensic imaging for use in litigation. "Because of that, we [need] buffers financially that you don't [need] in established or more predictable markets."

One of those safeguards has been short-term financing. Not long after launching the Boise company in 1997, Geis had to upgrade his photography small business equipment leasing equipment to get better aerial images. To fund the unanticipated purchase, the half-million-dollar company borrowed $80,000, most of which was financed for just one year. The interest rate was about 4 percent higher than for a longer-term arrangement, but the flexibility was well worth the cost, in Geis' view. "We don't know what we're making next week or four weeks from now," he says. "It allows us to make a minimum small business brokers payment if necessary or to load the money small business payment without penalty."


There are many situations where factoring can help a business meet its cash flow needs. It provides a continuing source of operating capital without incurring debt, which can result in growth opportunities that dramatically increase the bottom line. Virtually any business can benefit from factoring as part of its overall operating philosophy.

Every good businessperson must understand the concept and benefits of factoring in order to operate as profitably as possible. The following chart can help you understand the differences between factoring and other sources of funding.