BUSINESS FACTORING

Selling your business receivables, sometimes called invoice factoring, can be relatively painless if you are informed and knowledgeable about your financial options. MyNoteMarket has collected information about the business factoring process and resources to help you research your options.

Use the Education section below to quickly understand:

• How to Sell Business Receivables
• How Business Receivables are Priced
• Due Diligence - What questions to ask.
• Terminology

Once you have gone through the Education section, use the additional Resources to research potential buyers, review current news and blogs, and get links to tax and legal sites.

Education

How To Sell Business Receivables

1) First you should determine your business's current and future cash needs and financial condition. Since you can sell all or just a portion of your receivables, you should have a specific required amount in mind before you contact any buyers. It is recommended that you consult a financial advisor.

*Tip: Recourse transactions are the norm and will you receive the most cash for these type of factoring transactions.

2) Gather all you business receivable (invoice) documentation. While you will not need most of the documentation to get an initial quote, it is good to have it ready should you decide to sell your receivables. Documentation for an initial quote may include:

• Business type, history, contact information
• Invoices
• Customer contact information
• Proof of business ownership

*Tip: There is no need to send all your documentation for a quote, be wary of requests to gather too much information(like your Social Security information) for a initial quote.

3) Search for a buyer of business receivables or business factoring. It is very important to feel comfortable with potential a buyer. Please see "Due Diligence" for tips on selecting a buyer.

There are a number of ways to find a potential buyer:

• talk to your financial advisor or lawyer,
• use this site to identify potential buyers,
• search the Internet,
• talk to business associates who have used a business factoring company.

5) Get multiples quotes for your business receivables. Potential buyers will generally give you a free analysis and no obligation quote for your note. They should explain all potential options, fees and provide an amount that you will receive. While the highest quote may be attractive, you should consider all the factors together. These factors include: reputation, experience, your comfort level, etc.

*Tip: Ask the buyer up front about all costs and who is responsible for paying them.
*Tip: Beware of potential buyers who ask for a fee up front. There should be no fee for a quote or analysis.

6) Once you have selected a buyer, you will have to get approved or pre-approved, set up an account and sign a factoring agreement(or factoring arrangement). This agreement should outline the terms and conditions of the payments and all fees.

*Tip: Read the agreement carefully for all fees.
*Tip: Most factoring agreements are Recourse meaning you are personal liable for unpaid receivables.

7) Once your account is set up, you will provide additional information about your business, receivables and customers. It is recommended that you have as much information collected before you begin this process. This process can last between 1 to 3 days.

*Tip: Request to see the buyer's privacy policy.

8) Once the buyer has all the required information, they will review the receivables. This process usually lasts between 1 to 3 days, depending on the buyer and complexity of business receivables.

*Tip: Ask the buyer up front about the process and time to completion. Be cautious of very short process times.

9) Funding of your business receivables are generally in 2 stages:

1. The Cash Advance which is sent to you when you submit your receivables. This amount can range from 60 to 90%.
2. The final amount is called the Rebate. It is sent when the receivables are paid less any factoring fees.

Congratulations! You sold your business receivables.

*Please note: these are general guidelines, all situations are unique and vary by state and company.

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How Business Receivables are Priced

Business receivables are priced by determining a discount to apply to your receivables. These discounts can range from 1 to 10%. There are many factors in determining the discount rate to use, here are the most common:

• Type, history, creditworthiness of the business
• Profit margins
• Quality of customers
• Payment history
• Buyer's experience and funding sources
• Market conditions
• If the factoring agreement(arrangement) is recourse or non-recourse

Each potential buyer will individually determine how these factors are used to arrive at a price for your receivables. Pricing can vary greatly by buyer.

Check out these links for more information:

• Factoring Finance - Wikipedia

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Due Diligence

There are numerous potential buyers for your business receivables, it is hard to choose the right one. But with a little due diligence(research), you can select several that are reputable and right for you. One important point you should be aware is whether you are dealing with a principal or broker. If you a dealing with a principal, you may get better pricing due to the absence of the broker fee. Most principals use brokers to bring them business but there is a definite cost associated with this added layer of service. But brokers can be valuable in finding multiple buyers and could potential get better pricing even after factoring in their fee. The buyer should pay the broker fee, not you.

Here is a guide to help you choose the right buyer:

1. How long have they been in business?
2. Is their contact and business information verifiable?
3. Are they bonded or insured?
4. What is their due diligence criteria?
5. How is their Better Business Bureau rating?
6. Do they handle your type of receivables?
7. How many receivables purchases do they do a year?
8. Are they familiar with your state practices?
9. How will they discount your receivables?
10. Can they provide a time table for the process?
11. Do they use multiple financing sources for your quote?
12. Are they a principal or a broker?
13. Are they associated or member of a larger corporation?
14. Do they have a privacy policy?
15. Are they members of trade and professional organizations?
16. Are they professional in all communications and business presence?

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Terminology

Here is some basic terminology for business receivables:

Advance - The amount initial payment from the factoring company, generally 60 to 90% of the face value of all receivables.

Discount - The amount the factoring company reduces the face value of all receivables. It is generally includes all fees associated with the transaction.

Factoring Agreement- A contract for the purchase of business receivables between a Buyer and Seller, in which a seller agrees to sell and a buyer agrees to buy, under certain specific terms and conditions.

Rebate - The second payment for the receivables after the Advance has been paid. This amount is the remaining amount owed to the business owner less all fees(discount).

Recourse - The personal liability of the business owner for any unpaid receivables. For more info see: Factoring Finance- Wikipedia

Non Recourse - No personal liability to the business owner for any unpaid receivables. The factoring company bears all risks of unpaid receivables. For more info see: Factoring Finance- Wikipedia

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