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 “notificationâ€. 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 “verificationâ€. 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…â€
The opposite is:
â€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)â€.
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:
â€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 happyâ€
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 Happyâ€.
Copyright © 2007 Gregg Financial Services
www.greggfinancialservices.com
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Help answer the question about Finance
How to convince recruiters about a career change to Corporate Finance?
I am an Industrial engineer and want to make a move to Corporate Finance, one of the questions I get most often is why do I want to make such a career change and how I see myself fit into this role ? or justify how you can do well in Corporate Finance role despite your non finance background?
I am currently enrolled in a full time MBA program and planning to take finance courses but I want to know how I can really sell myself on this idea ?
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Mr. 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. For more information about GFS, please visit our website:
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at 0:28 it is written you can..but it shoul be:
At a certain point you CAN’T diversify your portfolio’s risk away.
haha..
2:30 “to calculate beta you need this big computer..”
haha
beta= ratio of st. dev on your stock under consideration to st dev of major index (proxy for mkt) times coeff. corr between rates of return on your stock relative to rates of retrun on your market proxy say: S&P 500 , or better NYSE (2000 stocks)
anyway
or just Cov bet stok and mrk, diveded by variance of mkt
simple as that .. no computers no nothing, hahaha
though it’s a cool video
really funny one
thank you
r.
nice
very simple but effective
I've been in Finance for so long that I've decided that I wanted to do a different degree that was along the lines of my future goals… Law. I did my BBA in Legal Studies. I was a Finance major at first. I will suggest that you stick with the Finance Major vs the Business Administration. I mean if you think about what exactly is the B.A. offering you when the bottom line of the degree is in Business Administration? To have a specialty gives you a 'know-how' that makes you more adept in taking on positions that offer stellar pay as Finance and Accounting is known for. Each person is different in terms of what they want to do with their future goals. I normally see students minor in Business Administration if their Undergraduate Degree is in a totally different realm. This is only to signal to the employer that you are versatile and have business skills. If you are a business student I suggest Finance if this is what you want. Finance is definitely interesting and keeps you on the toes not just in the sense of performing statistical analysis but also conducting market and financial research including technical analysis which keeps you in the loop of world news as much as national news. You begin to witness the chain in global commerce & media and how it effects one another and inevitably effects the market as well as consumers far and near.
Another point that comes to mind is the institution that is granting the Finance degree. What is their reputation in the Finance Department? Are they first class? Are they top-rated? Usually the "glamourous pay but slave to your job" are firms off of W-Street which hit Ivy league schools to join their Associate or Summer programs. These programs, once selected ..highly selective, gear you up for positions such as equity or fixed-income analysts. Again, the pay is here, the perks are there, but you get no life. If you're looking to have that lifestyle then ensure your alma-matter can deliver. Your grades will obviously have to stand on its own and well .. if you have connections then use them.
If you want something more exciting in Business then go for Marketing. I'm leaning to the Marketing aspect in my MBA program which will play instrumental in my Entertainment Law (Law, Marketing, Finance (Budgeting)).
Good luck with everything.
P.S. I suggest you take a few finance classes (required and as an elective) before you decide.
Traditional financing means your payments are the same every month for the life of the loan, e.g., $500.
In balloon financing, your payments will be lower, except at the end; this will be several times higher. In such an arrangement, your payment may be $350, but your final balloon payment might be $7000.
The latter type of financing is what trips up people, as they're able to make the smaller monthly payments at least until something happens – they lose their job, the economy turns sour, they have huge medical expenses, etc. Then they find themselves unable to make that balloon payment.
When exploring your options, have you crunched your numbers to be able to afford that car? (This is an important step in preparing for a big-ticked purchase.) Next, do you have enough money saved to be able to cover that balloon payment?
http://www.exinfm.com/free_spreadsheets.html
Are you working with a Realtor? Ask them to suggest someone.
If not, Find a Mortgage Broker/Banker who can shop the market for you and find an investor who will finance you.
If you cant find anyone, I hope you made the offer contingent on you finding financing, if not, you are out of your earnest money when you back out.
Good Luck!
You'll need a good solid business plan and have figures and answers to back it up. Plus some money out of your own pocket.
Thanks