Benefits of a Letter of Credit

Sadie Keljikian, Top Billion Finance

If you import goods, your suppliers probably require that you provide a deposit when you place an order. Suppliers usually request this for two primary reasons: (a) by getting an upfront deposit, the buyer is less likely to default on the remainder of the balance owed because the buyer would lose their deposit; (b) cash flow – the supplier needs funds to produce the goods and deposits are essentially interest free cash. Unfortunately for importers and wholesalers, deposits tie up and divert cash from day to day operations and other revenue generating or expansion oriented uses.

There are a few ways to avoid leaving substantial deposits or tying up cash to start production. First, you can minimize the size of your orders to avoid depleting your cash flow, but that would inhibit your growth. Big-box retailers generally place very large orders and offer significant opportunities to growing import businesses, so unless you find a way to accommodate these larger orders, it will be hard for you to attract big buyers. You can stagger orders so you don’t have to pay for everything all at once, but at some point, if you want to make substantial sales, you will have to find a way to finance large orders.

Another option to mitigate the burden of tying up cash for production upfront is to negotiate better terms with your supplier. If your company is large or you have a good history and/or trusted relationship with your supplier, you may be able to obtain goods on credit.  If you can get this option, use it.

A third option, if you want to take on larger orders and cannot obtain terms without leaving a deposit, is to offer your supplier a commercial Letter of Credit (“LC”) instead of a deposit. This gives your supplier a bank guarantee, which is an asset they can often use to obtain funding directly from their bank.

How do Letters of Credit work?

A letter of credit is a conditional assurance of payment provided to the supplier’s bank when the importer places an order. The LC is issued by a bank or financial institution on behalf of the buyer/importer and eliminates the need for a deposit by ensuring that both sides respect the conditions of the transaction.

Both parties benefit from an LC. The supplier becomes the beneficiary of a financial instrument they can use as collateral to obtain funding. They also obtain a bank guarantee of payment in addition to the buyer’s promise to pay for goods if all obligations are fulfilled. The buyer avoids the risk of tying up funds overseas and gets better control over the transaction. If the buyer uses a third-party provider, they can even obtain an LC without typing up collateral or cash lines with their own bank or financial institution.[1]

A commercial LC gives buyers comprehensive control over their importing process. It covers the cost of the goods themselves as well as shipping costs, allowing purchasers to keep their money until the goods are approved and shipped. While an LC may add to transaction costs, it grants the purchaser more control and more capital flexibility while giving the supplier more cash flow and some assurance of full payment.

Letters of credit benefit both the buyer and the supplier.

A letter of credit also serves as a layer of protection to ensure that you don’t waste time and money on an order that may not reach you on time or as expected. While your agreement with the supplier provides some degree of assurance that you won’t be left without your goods or money, there are no guarantees. Depending on the supplier, you may find yourself with faulty, defective, incomplete or late orders. Untrustworthy vendors can compound the issue by keeping your deposit regardless of their errors or inability to complete the orders as agreed. Without an LC, buyers can still take legal action against their supplier, but justice is uncertain and costly, particularly if the supplier is in another country.

In contrast, an LC requires collection of documents proving that the order is as expected and sent on time before the bank releases any payments to the supplier. The bank is basically acting as an escrow agent to ensure compliance by all interested parties. Thus, importers purchasing inventory overseas never need to worry about lost working capital due to failed or incomplete orders, and suppliers can still obtain the cash flow they need without burdening their customers.

Interested in discussing Letters of Credit or other trade financing and supply chain management solutions further?  Speak to one of our specialists.

One of the most important, often hard-won lessons is how to protect one’s self and one’s assets in transactional proceedings. Letters of credit are a safe, simple way to protect yourself and your purchase, especially in the case of international import/export agreements. You and your vendor are legally and financially protected, so you can even place orders from less-than-trustworthy vendors with confidence.

[1] Top Billion Finance specializes in issuing LCs on behalf of client without requiring cash collateral or deposits. We tie up and freeze our own lines on behalf of qualified clients undertaking verified commercial trade transactions.

Hidden Dangers of Loan-Stacking

Sadie Keljikian, Top Billion Finance

One of the most consistent difficulties one encounters in the process of expanding a wholesale business is the cash flow “crunch” that can occur when your customers want to order more of your products than you can afford to sell at once. Most customers don’t realize that wholesalers must pay their suppliers, shipping costs, and operational funds in the process of selling their goods to retailers. There are a few ways of handling this without having to turn down the sale. Many businesses choose to take out traditional-style loans as needed, but this can actually create more difficulty in managing your business’s finances.

It’s best to borrow conservatively.

If you receive multiple loans to boost your business’s cash flow, each one can hurt your credit, especially if you receive them in quick succession. When a business takes out multiple loans quickly, it implies that the business carries significant debt and very little collateral, which in turn, indicates high-risk to lenders. In addition, the more loans you take out, the harder they become to acquire, especially if the financial institution from which you borrow performs “hard” credit inquiries.

You may or may not be familiar with the concept of hard credit inquiries, but you’ve certainly been the subject of one at some point. Financial institutions perform hard credit inquiries (as opposed to soft inquiries) when a business or individual is actively seeking credit. This can be in the form of a credit card, credit line, loan, mortgage, and sometimes other financial commitments, like rental agreements. Hard inquiries reveal more details about your business’s credit and bill-paying habits, so a high credit score doesn’t necessarily guarantee approval.

When an institution performs a hard credit inquiry, your credit score will inevitably drop a few points, which isn’t typically a problem unless your credit is already compromised. Again, taking out multiple loans in a brief period will deplete your credit score more noticeably, so avoid it wherever possible.

Know your options and choose wisely.

A popular fix for mounting interest charges on multiple loans is debt consolidation, or “loan stacking.” Debt consolidation companies help you to pay off your debt fully and more quickly than you could on your own by decreasing your interest rates and combining your payments. Sounds perfect, right? But beware, there is more to your creditworthiness than simply your credit score.

The problem with loan stacking is that although it can help you get out of debt, it can also further deplete your credit (though not always noticeably) in the process. For this reason, it is vital to remain informed throughout the lending process, regardless of what method you choose to pay off your debt. Often, loan consolidation companies assist you by providing another loan to pay off your debts. Again, it sounds appealing, but you need to bear a few things in mind if you choose to do this.

Issues can arise when your hard credit inquiry reveals excessive borrowing or any loan stacking. Lenders often avoid taking on customers who have a history of loan stacking because it indicates a few unfavorable habits. As mentioned above, stacking one’s loans is usually a symptom of multiple unpaid debts that accrue overwhelming interest. Obviously, this indicates to a lender that you not only have poor bill-paying habits, but that they may not receive the interest they are owed if you struggle to pay and choose to consolidate again.

Alternative lending may be a better option.

Consolidation is a double-edged sword. Repaying your debts as quickly as possible is good for your credit score, but using consolidation services can still hurt your ability to borrow funds in the future. An excellent way to manage an ongoing need for working capital is to instead implement some form of Top Billion Finance, particularly factoring.

With Top Billion Finance, you consistently receive funding against your purchase orders or receivables to avoid depleted operational funds. Since the funds are only provided against confirmed sales, they are typically in smaller amounts and often don’t require further action from you. In the case of factoring receivables, your financial institution buys your current receivables and collects from your customers. This means that your cash flow is sped up, you needn’t pay back any of what you receive (barring a chargeback), and you are no longer responsible for those collections.

The long and short of it is this: business loans are useful, but be aware of how much debt you carry and make a specific plan to pay your debts. Even with sometimes helpful solutions like debt consolidation, borrowing more than you can reasonably pay back on time is unwise in the long term. When making decisions about your business’s financial future, be as conservative as possible and consider how your decisions today might affect your ability to grow or recover if you need funding in the future.

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Asset Class Break-Down

Sadie Keljikian and David Estrakh, Top Billion Finance

What are asset classes?

Assets are valuable properties owned by a business. There is a wide variety of assets across different industries and business structures, each of which affords different financial risks and opportunities. Assets can include stocks, bonds, real estate, fixed income, invoices / receivables, commodities, cash equivalents and personal investments.

Beyond the security of possessing a diverse portfolio, holding a variety of assets allows businesses to leverage their assets as collateral to in exchange for financial assistance from a bank or other financial institution. As a rule, the wider the variety and greater the number of assets, the more potential options there are to finance the business.

Here is a collection of the most commonly used assets and how they can best be used to finance a business:

Stocks as Collateral

Stocks are shares of ownership in publicly held companies. Since the value of a business can fluctuate quite dramatically with little or no warning at any given time, stocks can be more volatile in the short term. In other words, the value of stock assets can fluctuate significantly. Therefore, if stocks are used as collateral, banks and other lenders will offer significantly less funds relative to the current value of the portfolio. Advances of 50% are common, but it depends on the lender’s level of confidence that the current value of the portfolio will not decrease beyond the amount borrowed (or the interest due on principle).

Stock Raises and Equity Financing

Equity financing is a practice typically reserved for businesses that would like to raise funds to finance growth, but do not otherwise have sufficient assets or credit to obtain traditional lending facilities to finance their growth. The most popular variety of equity finance is venture capital, which is typically a high-risk, potentially high-return investment. Equity financing requires building business proposals and selling investors on business model that they believe can be executed with sufficient certainty.  After all, why invest in a company unless you believe it’s going grow, become more valuable and therefore give you a good return on your investment?

Fixed Income

Fixed income securities, or bonds, are investments that provide returns in the form of scheduled payments over time and eventually provide full return at maturity. The payments may, however, vary in amount over time. Depending on the credit debtor of the bonds, the value is of such assets does not fluctuate as compared to stocks. The note will be at face value and fluctuates only with inflation and the creditworthiness of the debtor. US government bonds, for example, are considered extremely secure when used as collateral.

Fixed income securities can be leveraged as collateral better than stocks because the lender can better rely on the asset maintaining its value from the time the loan is given until it is repaid. This allows lenders to give higher advances relative to the value of the asset. For example, while a lender might only provide 40-50% against the value of stocks, they might advance 60-90% to the same borrower against their bonds. So, while stocks have much more potential to increase in value, the reliability of such fixed income assets allows this asset class significantly greater collateral leverage.   Therefore, when used as collateral, fixed income assets should unlock more cash flow vis a vis stocks used in the same way.

Real Estate/Commodities

Real estate, which is also a form of equity, is extremely useful in financing. The most commonly known varieties of real estate financing are mortgage loans. However, in business finance, there are other ways to use real estate and commodities to fund day to day operations. Commodities can include precious metals like gold, agricultural land, and oil.

Personal Property Assets

Property assets are quite unique. They are often items of value that will depreciate, or even lose their value entirely over time, including things like cars, art, construction equipment, computers, and even race horses. Such assets can also be sold or leveraged as collateral. However, since they are not as easily bought and sold as stocks and bonds, their value is less liquid and thus, lenders price the extra risk into the cost of borrowing funds. This also impacts how large a percentage of the value of the asset lenders are willing to provide.

Due to liquidity concerns and depreciating value, borrowers should expect higher interest rates and lower advance rates. Lenders giving only up to 30-50% of the value of collateral is not uncommon. There are lenders who specialize in certain assets (e.g. art) and are better able to protect themselves against the risk. These specialized lenders can therefore provide higher advance rates and more accurately price the asset and any secured loans against it.

Common Business Assets

Invoices, equipment, machinery, and inventory are typical business property assets and are very appealing to lenders as a form of collateral.

Although these are all business assets, they are not created equal. For example, the value of an invoice depends on the creditworthiness of the customer who must pay that invoice and the likelihood that they will pay the full amount. In contrast, equipment and machinery loans are typically given by banks or specialized lenders who know how to price and sell machines if the loans default.  Inventory also fluctuates in value depending on the nature of the inventory, how easily it is sold, how much its price fluctuates, the business owners’ track record for selling similar inventory, and other potential factors.

Other Types of Assets and Getting Creative

While an asset usually has a fixed value and can be readily bought and sold, some transactions require more creative tools. For example, many wholesalers obtain purchase orders from their customers in advance of production but don’t have enough funds or credit lines to pay for their goods. Certain lenders specialize in outlaying funds to pay for production in exchange for either interest or a share in the profits of the underlying transaction.  This is called purchase order fund or “P.O. funding” and it is unique because it is neither a regular unsecured loan to a company based on financials, nor is it a secured loan against assets. Such lending is basically a hybrid of an inventory loan (since the funds are being used to pay for pre-sold inventory and the inventory purchased is used as collateral to secure the loan) and regular business line of credit.

Technically, a purchase order (or “P.O.”) is not an asset because it has no inherent value; it is simply a customer’s order to produce goods or services at an agreed upon price. While the PO funder is secured by the inventory that they finance and they often take a security interest against other assets of the business, the PO itself does not have any value until the goods are delivered as per the instructions of the customer. However, once the PO is complete and the customer is invoiced, many lenders are happy to take the resulting assets (i.e. receivables – invoices with payment due on a later date) and advance cash against them. This is called factoring. Unlike PO funding, which has what we might call “soft assets” or no assets, a factor advances funds against the value of a receivable, which is a common, bankable asset.

The point is that certain situations require creative solutions to accommodate the business and the transaction. Knowing how to leverage your assets (and sometimes even your non-assets) can be the difference between growth and stagnation or success and failure.

The bottom line is that in each of these instances, a business can leverage assets it already has and requires in its normal course of operations. By leveraging its assets as collateral, a business can access funds that are otherwise locked or frozen in value of those assets usually while still controlling, possessing, and deriving the full benefits of the assets. So, you can run your machines while using funds advanced to you by giving the lender a security interest (or “lien”) in the machine.

If a business intends to grow, it is, in the vast majority of instances, preferable to finance as much as possible through unsecured credit lines and credit lines secured by assets because interest will almost always cost less in the long run than selling equity (and often control) in your business for much less than it would be worth once you’ve had a chance to increase revenues through traditional financing vehicles.

What to Know Before Signing a Factoring Agreement

Sadie Keljikian, Top Billion Finance

If you plan to work with a factor to fund your business, it is vital that you do thorough research prior to signing anything. Obviously, it is important to be educated before signing any legally binding document, but the ongoing nature of trade financing solutions makes them the perfect trap for hidden fees and requirements.

Before you sign on the dotted line, here are some important questions you should ask your prospective factor:

What percentage of my invoice values will I receive in advance (i.e. what’s my advance rate)?

The percentage that you receive as an advance on your invoices is called an “advance rate.” Typically, factoring companies provide up to 80% of the total value when they receive an assignment. It is important to know your advance rate up front so you can predict available cash flow based on receivables.

What is the minimum sales volume required by the factor?

This is one of the primary points in determining whether the factor will accept your application or not. Most factors have a minimum sales volume for clients to ensure that each relationship will be profitable.

You should know that unfortunately, if your sales volume is low, your rates will be higher than that of a comparable business with higher sales volumes, even if it doesn’t keep you from successfully signing a factoring contract. Factoring is still a labor-intensive industry with high overhead so each client has to have enough volume or high enough rates to justify the cost of acquiring a new client.

What fees (beyond the standard rate charged on each factored invoice) will I incur during my contract?

Most factors include fine print in their agreements, which often contain the dreaded “hidden” fees that many have come to expect from banks and financial institutions. These can include termination fees if you end the agreement before the contract is up, annual minimums charged on a monthly basis, credit check fees, misdirected payment fees, invoice modification fees, and a myriad of other miscellaneous charges.

Occasional fees are to be expected, but if they seem excessive or confusing to you, there’s a chance that the factor is unopposed to taking advantage of less informed clients.

Does the factor perform credit checks in house? Is there a fee for credit checks?

All non-recourse factoring companies require a credit check of all customers whose invoices are factored. Since a non-recourse factor provides credit protection on their client’s receivables, the factor needs to know the payment habits and financial soundness of the end customer (i.e. the debtor on any assigned invoice). Credit worthy customers receive credit protection and are therefore considered non-recourse receivables. Non-approved accounts are not insured and therefore they are called “with recourse” because the factor has recourse to their client if the receivables fail.

Ask your factor if they insure your receivables (i.e. are they recourse or non-recourse factors) and, if so, whether they charge a fee for providing credit checks on your customers.

What varieties of factoring does the company offer?

It is very useful to know what types of factoring the company in question offers for a number of reasons. First, it is important to find out if your factor offers recourse factoring, non-recourse factoring, or both. This will determine whether you will be responsible should any of your customers declare bankruptcy without paying all of their factored invoices.

Once you’ve established recourse vs. non-recourse, you want to find out if your factor can adapt services to suit your needs. Practices like spot factoring or selective factoring are helpful if you find that you only want to factor a handful of your receivables. Bottom line, it helps to know if those options are available from the onset.

Does this factor have experience with businesses in my industry?

While it isn’t necessarily crucial to your relationship with your factor, you might be surprised what a difference it can make if your factor has experience in your industry. Each industry has its own unique structure and potential difficulties to consider and when you bring a financial institution into the equation, so it helps if they’ve dealt with the difficulties specific to your industry. Some factors specialize in certain industries. Where possible, try to work with a factor who specializes in and knows your industry.

What is the maximum credit line that will be available to me?

Depending on the factor, there may or may not be a flexible limit on the credit line they can offer you. Typically, a factor is either a department at a bank, or has a close relationship with one or more banks. This allows them to offer substantial credit lines, provided that your customers have good credit. Some smaller factors, however, can only offer limited hard caps on cash lines due to limited access to funds. Ask before you sign to determine if the factor is suited to meet your financial needs.

In general, it is important to research the business with whom you are working, particularly when your sensitive information is involved. The best practice is to familiarize yourself with the factoring industry in general, that should inform any questions you might need to ask in order to be prepared to sign anything. Also ask for references to ensure that other clients have been satisfied with their experience. Use your instincts and do your homework. Your diligence will be rewarded.

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Factoring Checklist: What You Need and Why

David Estrakh and Sadie Keljikian, Top Billion Finance

You’ve done your research, vetted private lenders and banks, and found the funding arrangement you need. You’re ready to enter a factoring agreement. However, before you do, you should know that all factors will require some business and financial documentation before factoring your receivables. Here is a list of the materials you will need and why factors ask you for them.

  1. Factoring Application.

This is step one in your relationship with your factor. The application usually requires basic information, including the name of your business and officers, a description of the business, ownership structure and other general information that helps your factor get to know you professionally. Beyond surface details, the application will often ask you to provide the following: (a) your certificate of incorporation (or the equivalent), (b) federal ID number, (c) owner’s photo ID, or (d) other state or federal documentation. This is to verify your business’s details and protect the factor from fraud and wasting time on companies that are not a good fit.

  1. Customer List.

Although many factors include a section in their factoring application that allows you to write in your list of customers, this is sufficiently important to warrant its own section.  Since non-recourse factors rely on the quality of your receivables to provide advances against your invoices, it is of paramount concern that the debtors on those receivables (i.e. your customers) are credit worthy.  Although recourse factors are usually not as concerned as their non-recourse counterparts with the quality of customers comprising your receivables, all factors will want to have at least some idea of your customer base and their credit worthiness.

Non-recourse factors need to know because they are going to underwrite the credit of credit worthy customers and make a lending decision based on their credit determination.  Recourse factors need to know because they might adjust the amounts they are willing to fund based on your customer’s credit-worthiness and because they need to know how likely it is that the invoices will pay on their own to price their lending.  For example, if a recourse factor knows some accounts pay poorly, they know they will have to rely more heavily on their own client’s credit-worthiness to assure payment in the event of default.

  1. Corporate tax returns and financial statements.

Not all factors require a company’s tax returns and financial statements but it is a common request. As discussed, factoring companies and banks that provide receivables factoring are generally concerned first and foremost with the creditworthiness of the customers.  However, the client’s financial background is requested sometimes in order to verify sales volume and revenue. Also, recourse factors do want to see that your company is healthy enough to repay receivables advance if your customers default.  If your factor asks for corporate financial details, it is best to present a thorough audit performed by an independent third party accounting firm to provide maximum transparency.  Otherwise, at least make sure the information is clear and accurate or it may affect your lending arrangement and put you in default if the factor later discovers inaccuracies or impropriety.

  1. Current aging of accounts receivable.

This is an important part of the equation for several reasons. It provides your factor with a snapshot of your customer list, which is very important to your factor, since customers pay factors directly in most agreements. It also lets your factor know how timely your customers are with their payments and how much bad debt you carry as proportion of your receivables. Since factoring is lending against receivables, your customers’ credit is more important than yours, so it is vital that the customers whose invoices are being factored pay on time.  Since factoring prices depend on expected factoring volume, a good A/R should comport with your own assessment of expected annual sales.  If you ask your factor for a rate given to companies making $10 million or more in sales annually, then your receivables should be substantial enough to support that claim.

  1. Copies of any and all UCC filings on your Company.

This is crucial. Factors generally need to have first position liens on receivables and inventory since they are providing funding against these assets.  In order to secure their collateral, factors take a security interest in the assets classes they fund. A first position lien (or “security interest”) means that the factor has priority over anybody else to collect on or seize those assets. For example, if the factoring client declares bankruptcy, the factor is prioritized in benefitting from liquidation of the goods against which they have financed. For non-recourse factors, if the debtor on the receivables goes bankrupt, the lien allows the factor to claim payment of the receivable debt in bankruptcy court.  Thus, without a first position security interest, the factor has minimal security or protection in the event of default.

  1. Any current licensing agreements.

When you enter a factoring agreement, your factor relies on the value of the goods you sell. Consequently, should the value of your goods be damaged, your factor would be the one to suffer. If your goods are in violation of a copywrite or trademark, this directly impacts the value of your goods because you will not have a legal right to sell them. Even worse, the licensor may have a legal right to the goods or to legal damages.  Therefore, factors ask for any licensing agreements your company currently holds in order to confirm that you are not in violation of any licenses and thus, that your goods will retain their value.

Like anything, factoring requirements vary from one to the next, but the above should serve as a universal checklist for the most commonly requested pieces of documentation. When you sign on with your factor, do not be afraid to ask lots of questions, especially if you are being asked for any unusual or particularly sensitive information. A good factor will always be able to explain why they are requesting certain information or documentation and should be open to providing Non-Disclosure agreements under reasonable circumstances. If you’ve chosen your factor well, they will be very happy to educate and reassure you about the process.

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On Deck Capital Shares Plummet

After record losses in Q4, online lender On Deck Capital suffered a drop of as much as 24% in their shares Thursday morning. The abrupt drop led Tybourne Capital, the company’s largest shareholder, to sell its entire stake.

Since the company went public two years ago, it has yet to gain profitability and reported a loss of $85.5 million in 2016.

Read more from Wall Street Journal.

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Top Billion Finance vs. Bank Loans Part II: Your Options

Sadie Keljikian, Top Billion Finance

There are several varieties of Top Billion Finance that offer working capital flexibility well beyond that of a traditional bank loan. Whatever causes your particular cash-flow problems, chances are there is a Top Billion Finance solution perfectly suited to your needs.

Factoring and Purchase Order Financing are two of the most common varieties of trade financing. Both methods are ideal for vendors who sell large orders to retailers on open terms. Factoring is an agreement whereby you sell your open invoices to a company, known as the factor, and they then typically provide you with approximately 80% of the value of the invoices immediately. Your customer(s) then owe the factor the invoice total and you receive the remaining balance, minus factoring fees, when your customer pays your factor.

Factoring is an excellent solution for those who need payment for their outgoing orders immediately but are reluctant to decline offering open terms to their customers. Since factors usually advance funds based on a percentage of your invoices (i.e. your receivables) the credit line is only limited by how many invoices you can generate. Factoring allows you to fulfill as many large orders as you receive without worrying that your working capital will be held up or depleted by waiting to get paid on invoices.

Purchase order financing (also called “PO funding”) is similar, with some subtle differences. When you apply for PO funding, you must provide accurate, up-to-date purchase orders from your customers. Once the purchase orders are confirmed, you receive a percentage of the total value of the PO. Receiving payment ahead allows you to use those funds to pay for manufacturing and shipping costs which frees up your working capital, allowing you to take on more orders.

If your business has been hindered by suppliers, particularly if those suppliers are located internationally, a letter of credit may be the best solution for you. LCs replace deposits, cost of goods and shipping costs you provide to your suppliers and provide an extra layer of protection for both you and your supplier. A letter of credit functions somewhat similarly to an escrow in the sense that it assures the supplier of payment, but only on the condition that goods are shipped on time and received as expected.

Top Billion Finance allows you and your business to grow and adapt by drastically increasing cash flow on multiple fronts. A growing business has more cash flow issues than most people realize and your company’s growth should be handled carefully, with the help of experts. Top Billion Finance professionals understand that your business needs funding in order to operate and will not trap you in a cycle of debt and inflexible lending terms that will ultimately hurt your expanding business. By following a transactional model, trade financiers target funds to ensure that both the borrower and lender are made whole and protected all throughout.

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Top Billion Finance vs. Bank Loans Part I: Services

Sadie Keljikian and David Estrakh, Top Billion Finance

Top Billion Finance helps to finance the costs of trade, usually the costs of importing or exporting goods and the costs of getting those goods to the end customer. Bottom line, business growth can be difficult to manage. As you gain customers, particularly big buyers and retailers, you may find yourself scrambling to maintain sufficient cash flow to keep up with and fulfill larger orders while maintaining standard operational overhead.

The Supply Chain Cycle Cash Crunch: The cash crunch wholesalers often experience is usually the result of the supply chain cycle: wholesalers, particularly importers, must lay out cash or use their lines of credit to start production, which can take months. Once production is complete, wholesalers typically have to pay remaining balances for the cost of goods plus shipping, duties, and freight. Even after goods reach you, you then have to pack, sort, and ship them according to each individual customer’s preferences. And then, even after the vendor finally ships the goods to their end customer, the vendor won’t be reimbursed for payments to their suppliers until the customers pay their invoices, typically 30-90 days after delivery. All the while, the wholesaler must pay their employees, rent, office costs, and other typical operating expenses. Thus, the supply chain cycle from production to delivery leaves their funds depleted.

Traditional Loans: Many business owners are inclined to take out traditional bank loans to supplement their cash flow, but banks providing loans often have stringent requirements, inflexible terms, and take a long time to receive. At the end of the day, traditional loans can be as much of a hindrance as they are a help.

Applying for a business loan involves exorbitant amounts of paperwork and substantial time to structure and underwrite, meaning funds generally do not reach you promptly. Banks also structure loans based on your business’s credit, meaning that any history of financial difficulty will count against you. Banks also tend to be especially conscious of risk, preferring to only provide funding when assets are abundant and therefore risk is low. Yet, the most obvious drawback of these loans becomes apparent when you actually receive the loan. Your line will generally be limited, inflexible and hard to supplement with alternate financing because banks often perceive other lending arrangements as potential threats to their own position.

Top Billion Finance: If you need capital to fund operations quickly and could use financial and logistical assistance throughout your supply chain, trade financing may be the best option for you.

Trade financing is different from a traditional loan, because funds are advanced based on your current transactions and your customers’ credit, rather than your own credit or that of your business. Since funds you receive are against your invoices and purchase orders, the financing you receive can grow with you. You also won’t have to worry about providing years of pristine financials. Moreover, since Top Billion Finance is tailored to grow relative to sales, you will not have to apply for credit line increases when your sales increase. As your purchase orders and overall sales increase, most trade financiers will increase their lines to accommodate the growth, thereby offsetting the funding gaps that arise when you have to pay more for cost of goods, shipping, and freight.

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Factoring Varieties: A Beginner’s Guide

Sadie Keljikian and David Estrakh, Top Billion Finance

Factoring receivables is a simple, elegant solution for insufficient cash flow in business-to-business sales relationships. It allows vendors to sell large orders to retailers and assign the receivables to a third party, thus avoiding depleted operational funds while outsourcing collections labor and risk. Factoring often refers to a variety of different services bundled together: (a) A/R management and collections; (b) credit protection; and, most popularly (c) cash advances against receivables.

If you’ve recently decided to factor your receivables, you probably find yourself dazzled by the varieties of factoring and at a loss to distinguish how they differ from one another. Each type of factoring is ideal for addressing specific circumstances depending on the industry, sales volume and customers involved, among other criteria in addition to the specific needs and wants of the factoring client.

The following are a variety of factoring methods, some of which can be combined or modified to suit the client’s needs:

Full-Recourse Factoring

A very common practice for factoring receivables in general, a full-recourse factoring arrangement transfers the debt on invoices to the factor in question, but leaves the credit risk with the client. In other words, the client agrees to buy back invoices if the factor is unable to collect payment. This arrangement is popular when the client’s customers have poor credit and/or a history of delinquency on payments, because it does not require that the customer have good credit. While it is generally costlier because the risk is higher, full recourse factoring is also a good solution for clients who do not want their customers contacted. Many recourse factors are more willing to allow payments to be made to a lockbox in the client’s name rather than directly to the factor as is the case with non-recourse factoring.

Non-recourse Factoring

Contrary to full-recourse factoring, non-recourse factoring means that the factor absorbs the credit risk on factored invoices. This means that the client is not responsible for customers who pay late or not at all due to issues like bankruptcy, insolvency, and even refusal to pay without reason. In addition to lower costs, outsourcing collections, and enhanced lending options, non-recourse factoring has the added value of protecting the factoring client from poor credit or lost capital at the hands of delinquent customers.  However, to secure their receivables collateral, non-recourse factors want to notify and collect directly from the factoring client’s customers, which some factoring clients prefer to avoid.

Advance Factoring

An advance factoring agreement is one in which the factor advances the client a substantial portion of their receivables as soon as the goods are sold to the customer, less any fees. The customer then pays the factor within the terms of the invoice. Advance factoring can be done with or without recourse and is one of the more common varieties of invoice factoring. Advance factoring can also be called “receivables financing.” Since all open invoices are by definition considered receivables, any funding provided by using the receivables as collateral or security for the funding is considered receivables financing. Most factors offer advance factoring and most clients are mainly interested in this component of factoring, which is separate from the collections, credit protection and A/R management services.

Spot Factoring

Spot factoring allows the client to choose individual invoices to factor, rather than all open invoices or all of the invoices with a particular customer. This allows a vendor to fulfill small numbers of large orders as they come in, without worrying about insufficient operational costs or relinquishing control over the rest of their accounts receivable. The advantage is that the factoring client has very minimal or no commitments to assign invoices.  However, since the factor is taking on a larger risk and smaller volume, their rates are often substantially higher than traditional factoring rates which are given with the understanding the factoring client will factor all, or most, of their receivables.

Selective Factoring

This is a good option for clients looking for something in between the traditional factoring requirement to assign all receivables and the spot factoring option of no commitments but substantially higher costs. For those who don’t have enough sales volume to enter a long-term contract with a factor, selective factoring is a very helpful solution. Rather than factoring all or most receivables, which is very often required in traditional factoring agreements, specific accounts are chosen and only those customers’ invoices are factored. This means that a vendor with several small-scale retailer customers and a few big-box stores can accommodate the needs of both by factoring the large customers and handling the small accounts on their own (or vice versa at the client’s discretion).

Bulk Factoring

In bulk factoring agreements, financing is provided for the current total value of the client’s accounts receivable, rather than the usual practice of factoring invoices. There are a couple of reasons why a client might want to take this approach. Bulk factoring is popular among large-scale distributors who need to clear their balance sheets and improve their liquidity. It can also be helpful for vendors whose sales are mostly quite small and distributed among many customers, since bulk factoring removes the need to factor specific invoices. This practice also appeals to a lot of businesses because the client typically remains in full control of accounts receivable operations, including collections, keeping operational responsibilities in-house.

Non-Notification Factoring

If you prefer for your factor not to contact your customers, non-notification factoring is for you. This arrangement can be a bit more expensive, as the factor will have to do more work to avoid contacting customers. Funds often go to a lockbox and the factoring client’s customer may be unaware that the invoice is factored at all. While this is a good system for customers who might be slow to trust, you’ll find that many retailers are familiar with factoring and aren’t concerned by their invoices being factored.  Non-notification factoring is usually coupled with recourse arrangements because non-recourse factors who offer credit protection on receivables want more control, which requires handling invoices directly and notifying the customer.  If you want credit protection, this may not be the best option – it’s costlier and riskier, and its only advantage is that your customers are not notified by the factor.

Collection Factoring

In maturity factoring agreements, the factor takes over all credit, collection, and accounts receivable management functions and usually provides credit protection on the client’s receivables. Funding, however, is not provided to the client until the due date on the invoice or slightly thereafter. Basically, the factor performs all the service functions of factoring without the lending component and thus, there is no interest charge in the arrangement.

Industry Specific Factoring

Standard factoring usually applies to wholesalers who sell consumer goods to retailers. However, there are many industries that are unique enough to warrant factors that just cater to them. Some of these industries include healthcare, commodities, construction, shipping/logistics, service providers, and US exporters selling mostly to foreign countries, among others. Each industry has its own risks that require specialized knowledge. For example, to provide factoring on medical receivables, a factor must be familiar with how medical billing works and how insurance companies treat certain invoices, while factors who service sellers of certain food products should understand USDA and FDA regulations.

Although some factors have multiple specialties it is best find a factor that knows and specializes in your particular industry. Since factors are, by the nature of the relationship, watching out for their clients’ best interests and making sure they get paid, a good relationship usually involves some informal guidance and consulting. Consequently, it is enormously helpful if the factor providing the guidance has firsthand experience with and knowledge of your industry and the corresponding mechanics of it.

Each of the above varieties is designed to serve specific financial and organizational priorities, but the overriding theme is that most factoring is geared to keeping your cash flow healthy and your receivables safe.

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Collateral Damage Control

Sadie Keljikian, Top Billion Finance

If you need to finance your business, you will be required to provide collateral. No matter what kind of funding you seek out, nearly every bank and private financial institution will require an asset to secure the loan. This makes a lot of people nervous, the word “collateral” has developed an unfortunate connotation of expendability and brings foreclosure to many minds. Fortunately, this doesn’t mean that you’ll have to risk losing your business, home, or savings. Unbeknownst to many, collateral can take many forms and most business owners aren’t aware of the full scope of their options.

Collateral is a general term for assets against which a bank or private lender can provide your business with funding. Aside from the well-known practice of using buildings, equipment, or savings as collateral, trade financing also allows the use of accounts receivable, inventory, and purchase orders. Top Billion Finance can offer solutions to numerous business models thanks to a variety of lending options. This means that you can receive funds to supplement your operational costs without risking your business or crucial assets.

With solutions like factoring and purchase order financing, you can borrow against existing orders for which you have yet to be paid. This is an excellent solution for vendors selling to retailers on open terms and allows you to increase your business’s cash flow without incurring long-term debt or potentially sacrificing your business.

If you own a retail shop or other store-front type of business, a merchant cash advance may be the best solution for you. MCAs are loans against your day-to-day credit card sales. You receive one lump sum and the lender takes a portion of your credit card sales until your loan and interest is repaid. Again, this means that your sales are your collateral, leaving you less at risk of losing vital capital.

The collateral you offer also helps to establish and raise your credit line in Top Billion Finance. This means that as long as you keep making sales and your customers pay on time, your credit with your lender will remain strong. You can fulfill as many orders as needed without worrying about deficient operational funds. Trade financing is also immensely helpful in padding out your working capital without accruing interest on the funds you’ve received. When your customer accepts the sale, the documentation thereof (either a purchase order or an invoice) becomes valuable for trade financing and leaves your jurisdiction. You receive payment earlier than you would have, minus fees, and are able to continue running your business without the concern of costs outweighing revenues.

In short, collateral is not a dirty word. Despite the understanding that your lender will hold a lien against your assets until you’ve repaid your debt, you can borrow funds to keep your cash flow healthy without fear of losing everything. Financing in smaller amounts and against your active assets allows you to grow with the knowledge that you are both sufficiently funded and protected from crucial losses.

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