Professional Documents
Culture Documents
g and
Factoring Basic Skills
Workshop
MODULE 1:
INTRODUCTION
Purpose of the Workshop:
Manufacturers Service
S i P Providers
id
International
I t ti l Receivables
R i bl
Inventory
e to y at numerous
u e ous locations
ocat o s
Foreign inventory
MODULE 3:
BASIC CREDIT SKILLS
Purpose
What makes up
p the Inventory?
y
Commodity Good - Most Desirable
Components of Manufactured
Goods - Least Desirable
How is it valued?
Price Set By Exchange - Most Desirable
Market Driven - Least Desirable
Is there a ready market for the
Inventory?
Large Number of Potential Buyers - Most Desirable
Limited Number of Industry
Competitors - Least Desirable
Work in Process.
Inventory in remote locations
Consignment Inventory
Obsolete Inventory
Rules of Thumb in Establishing Account
Receivable Advance Rates:
Accounts Receivable Advance Rates typically
range from 65 to 90%
90%. The most typical
advance rate is 75-85%.
The higher the quality of Accounts, the higher
the advance rate.
Aggeneral formula for estimating
g A/R advance
rates = 100% minus (past due percentage +
10%))
or 100% minus (dilution percentage + 10%)
Rules of Thumb in Establishing Inventory Advance
Rates:
Inventory Advance Rates typically are much less
than against accounts receivable
receivable. Typical
ranges are 25-50%.
The more liquid the Inventory the higher the
Advance Rate.
The more commodity in nature the Inventory,
Inventory the
higher the Advance Rate.
The more control a lender may exercise over the
inventory, the higher the Advance Rate.
A complete financial package for an Asset Based
Loan should include:
"Total
Total current liabilities"
liabilities is the sum of accounts
payable, accrued liabilities, notes payable, and taxes.
Long term liabilities are debts that are due in more than one
year
Long Terms Debt is all amounts financed on a term basis that
wontt be repaid within the current year
won year.
Other long term liabilities may include deferred taxes, long term
contracts payable or other miscellaneous obligations not due
within one year
year.
"Total long-term liabilities" is all Long Term Debt and
other obligations
g not due within the yyear.
"Total liabilities" is the sum of total current and long-
term liabilities.
Total Assets Total Liabilities
= Net Worth
Capital 100
Leverage 9:1
De-Leveraging Impact of True
F t i (After)
Factoring (Aft )
Assets Liabilities
Leverage 5:1
Factoring Considerations
IMPORTANT LESS IMPORTANT
Debtor Quality E
Earning
i & Cash
C h
Flow
Quality Paper
Paper-trail
trail
Financial Ratios
Invoice Tracking
Covenants
Minimum Requested Info on
Prospective Client
Completed Customer List
A li ti
Application (Name, Address,
Fiscal Year End Phone, Fax)
Fi
Financials
i l Current
C Personal
Most Recent Interim Financial Stmt. on all
Financial Statement Owners with over
Detailed A/R Aging 20% interest
Detailed
D t il d A/P A
Aging
i Sample Invoices and
Back-up
Key Elements For Factoring
Debtor Quality
Average Size of Invoice
Invoice Turn
Quality of Paper-trail (Debtor sign-off)
Terms of Invoice
Warranty or Future Performance
Considerations Not as Important in
F t i
Factoring
Financial Statements
Financial Ratios
Covenants
Other Collateral
Personal Guarantees
D.I.P. Financing
g
Many frauds
M f d start
t t as an honest
h t fraud
f d but
b t
same effect
Due Diligence Review Prior to Issuing a
Proposal or Commitment
Most recent two prior year end financials
Most recent period ending financials with
th prior
the i years ffor th
the same period
i d
Accounts Receivable detailed aging for
most recent period ending
Accounts Payable
y detailed aging
g g for most
recent period ending
Inventory Perpetual report
Personal financial statements on all
potential guarantors
guarantor s
Tax returns on the company for the most
recent two prior year ends
Tax returns on the potential guarantors for
the most recent year end
Any historical or narrative information on
the company
Analyzing the Information
Receivables issues to look for:
Customer concentration that is performing
poorly
p
Customer disputes or high
g level of dilution
Cross aged accounts (20% of debtor balance
over 90 days)
Failure to maintain credit criteria in extending
debtor credit (look for balances in excess of
credit limits)
Large balance of receivables over 90 days
Payables issues to look for:
Large concentrations with few vendors (may
exhibit credit limit issues)
Cross aged with key vendors (20% of total
payables over 90 days)
Large balance of payables over 90 days with
limited current balances (signal of being cut off
and making gppayments
y against
g COD shipments)
p )
An underwriter should be concerned about
continued support
pp from key y vendors
Balance Sheet issues to look for:
Items listed in assets that might balloon the value of the
company.
High inventory amounts (can signal poor purchasing
decisions, or bad inventory)
Notes due from stockholders (might mean that the
stockholders are pulling vital cash from the company)
Accounts payable exceeding accounts receivable (may
indicate a drop-off in sales)
Liabilities - identify all the creditors, determine the
collateral securing each loan and understand the debt
service requirements.
requirements
Profit and Loss Statement issues to look for:
Understand the gross profit margin your
prospect is working with
with.
Look for large dollar items and understand what
they signify
signify, being sure to get good explanations
for each category.
What is the bottom line income and what is the
story behind it?
Due Diligence Review Prior to Closing The
Fi ld E
Field Exam:
Corporate Commercial
Branch Banks
Division Division
targeting
Targeting Targeting
companies
50MM in 5MM- up to
under 5MM
annual sales 50MM
Key Questions to Ask a Bank Referral
Source
Have you ever referred anything out to another lender?
How do you deal with your turndowns do you just send
them away or do you try to find an alternative source of
financing g for them?
What size transactions do you target? Do you limit
yourself to certain industries or market segments?
Who makes the decision to decline a prospective loan
transaction?
What happens to problematic loans that are in the
portfolio
tf li ttoday?
d ? WhWho makes
k th the d
decision
i i tto refer
f ththem
out to potential take out financing sources?
Other Referral Sources
Accountants Telemarketing
Consultants Direct mail
Venture Capital Target Specific
Companies Companies by D&BD&B,
Lawyers SIC Code, Industry or
Turn-around
Turn around other Such Lists
Specialists
Brokers
Developing Referral Sources
Prioritize
Limit
Li it
Work them Hard
Follow up
up, Follow up
up, and Follow up
but
D t C
Dont Confuse
f A
Activity
ti it with
ith R
Results
lt
How Customers want to be Treated
Give them the facts Dont ever argue with,
Tell them the true truth confuse, or talk down to a
Give them the reasons prospect
why the product or Listen to the prospect
services yyou are offering
g Make the p prospect
p laugh
g
are perfect for them and Take an interest in what
give them proof the prospect does
Be able to explain why Deliver what you sell
the price is fair when you say you will
Give testimonials of other deliver it
customers that you have Help the prospect buy;
helped dont sell him
Preparing for the First Meeting
Be on time, be professional and be empathetic
Outline what information you will need before
you can proceed to develop a proposal
Set a firm appointment and begin forming
contracts based on commitments
Call
C ll th
the prospectt th
the afternoon
ft b
before
f or th
the
morning of the appointment
The First Meeting