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Asset Based Lending

g and
Factoring Basic Skills
Workshop
MODULE 1:
INTRODUCTION
Purpose of the Workshop:

To teach entry level business development


officers
ffi in
i th
the entrepreneurial
t i l and
d smallll
lender segment of the asset based lending
and d ffactoring
t i industry
i d t ffundamental
d t l skills
kill
needed for professional success.
Goals:
This workshop has been designed to:
Provide essential knowledge g of the p products
being offered by lenders in the entrepreneurial
and small lender segment of the industry.
Reinforce basic credit skills, including how to
evaluate collateral.
Provide knowledge about and a system for
approaching due diligence investigation of a
prospect.
prospect
Develop skills for working with referral
sources and prospective borrowers to
maximize the opportunities available for
lending.

Provide basic knowledge about operations.


Presentation of Material:

Module 1 Module 4 Due


Introduction Diligence
Module 2 Module 5
U d t di
Understanding S l
Salesmanship
hi
the Product Module 6
Module 3 Basic O
Operations
ti
Credit Skills
MODULE 2:
UNDERSTANDING
S G
THE PRODUCT
Purpose:

The purpose of this module is to introduce


the basic products sold by asset based
lenders and factors.
Goals:
At the end of this module, participants will:
Have a better understanding of the type of
financing a factor provides.
Know what types of companies use factoring
services and why.
Have a better understanding of the type of
financing an asset based lender provides.
Know what types of companies use asset
based lending services and why
why.
What is Factoring?
g
Factoring is the sale of a companys commercial
accounts receivable at a discount to generate immediate
cash.
cash
Factor purchases a clients invoice(s) and immediately
advances 75% to 85% of invoice total.
Once an invoice is fully collected by Factor, the balance
is released to client, less the discount.
Most facilities are funded on a full recourse basis.
Factoring may be on a notification/verification basis or
non-notification/non-verification basis, although
notification/verification is most typical.
Benefits of Factoring
g
Generates immediate cash from operations
No restrictive financial covenants
Often an alternative for clients that might
otherwise sell equity
q y or seek p partners
Clients utilize full benefit of Factors credit
department at no additional cost.
Allows clients to take advantage of purchase
discounts
De-leveraging effect
Typical Factoring Clients
$1 to $30 million in annual sales
Limited operating history
history, turnaround situation or high
growth
Quality products and services
Quality customer base
May have high A/R concentration
May have high leverage
The common bond of most factoring clients is the need
for working capital beyond levels available through
conventional bank lending.
Ideal Factoring Clients

Manufacturers Service
S i P Providers
id

Wholesalers Companies with


Fortune 1000 Debtors
Distributors Temporary
p y Help
p and
Employee Leasing

Key principle SELL & FORGET


Factoring
g Clients to Avoid

Construction Sub-contract Billing

Medical Bad Quality Paper


Progress
Progress Billing
Terms
Warranty or
Guarantee
Common Theme there is something
between doing work and making collection
Variations on Factoring
Variation Pitch

Old Line vs Non Traditional Old Line tends to be Retail /


Rag Trade focused

Recource vs Non Recourse More Cash Availability vs


Sleep at Night

Spot (Single invoice/Debtor), Selective Debtor Freedom vs Ongoing Cash


& Full Turnover need (and rate)

Re-factoring Method of financing portfolio

Purchase Order Finance Often uses factoring for exit


What is Asset Based Lending?
Asset based lending is secured lending based on a
formula applied to commercial accounts receivable and
inventoryy to g
generate immediate working
g capital
p
Typically receivables less ineligibles are included in the
borrowing base at 75% to 85% of invoice total
Typically raw materials and finished goods inventory are
included in the borrowing base at not greater than 50%
of cost or liquidation value
The borrowing base is adjusted on a daily basis from the
sales journal
j
To have an accurate borrowing based facility companies
must have a perpetual inventory system
Benefits of Asset Based Lending
g
Generates more working capital than factoring
via inventory
y advance

Doesnt require the daily back-up paperwork


required in factoring

Typically a less expensive alternative than


factoring

An alternative for clients that might otherwise


sell equity or seek partners
Ideal ABL Clients
Companies with $5,000,000 or more in annual sales

Companies with at least two to three years of operating


history

Companies with a maximum of two years losses


demonstrating some ability to turn around

Companies with no high A/R concentration

Companies that may have high leverage but also have a


positive net worth

Companies doing leveraged buy-out transactions


ABL Clients to Avoid
Progress bill A/R

Sub-contract bill A/R

International
I t ti l Receivables
R i bl

Inventory
e to y at numerous
u e ous locations
ocat o s

Inventory in transit from foreign countries

Foreign inventory
MODULE 3:
BASIC CREDIT SKILLS
Purpose

To familiarize the new business


development officer with basic credit skills
related to categorizing prospective
customers for an asset based or factoring
loan facility.
Goals
At the end of this Module, Participants will:
Understand and be able to apply basic
evaluation methods for the categories of
collateral that make up the collateral pool for an
asset based or factoring facility.
Be able to determine with relative confidence the
quality of collateral offered for a loan transaction.
Understand the basics of Accounts Receivable
agings and be able to evaluate.
Understand the concepts p of advance rates,,
ineligible collateral, and dilution.
Understand and be able to apply basic
evaluation
l i methods h d to prospects'' fifinancial
i l
statements.
Understand basic cash flow concepts as they
relate to the quality of a prospect.
Bee ab
able
e to app
applyyap practical
act ca app
approach
oac when e
evaluating a prospective customer.
Six Cs of Credit
Collateral Capacity
Character Conditions
Capital Common Sense
Tools for General Evaluation of Accounts
Receivable:
Who is the Receivable from?
What are the terms?
Is the sale complete?
p
Is there the possibility of dispute of the
receivable?
How long is the collection cycle (A/R
turnover)?
Gone Concern vs Going Concern
Application of Tools:
Who is the Receivable from? Concn
Large, Well Capitalized Company - Most Desirable
Company in Financial Distress - Least Desirable

What are the terms?


Standard Terms or Less - Most Desirable
Extended or Unusual Terms - Least Desirable
Dated Receivables (Seasonal)
Consignment / Guaranteed Sale
Is the sale complete?
Complete with Documentation (Bill
of Lading,
Lading Verification,
Verification Etc
Etc.)) - Most Desirable
Lacks Shipment or Additional
Work to Be Complete - Least Desirable
Percentage Billings
(payments based on % completed)
Progress Billings
(payments made at set intervals until completion)

Sell and Forget remember..


Is there the possibility of dispute of
the receivable?
No Dispute, Sale Complete and
Verifiable - Most Desirable
P
Possibility
ibilit off Di
Dispute
t ddue tto work-
k
manship or Completion of Sale - Least Desirable

Consider method of verification Hard good, soft bad


Hard Written, Direct Verbal, Online Vendor site (sort of)
Soft Email, Verbal with client involvement (!!), Supporting Docs
How long is the collection cycle (A/R
turnover)?
Consistent with or Better than
Industry Averages - Most Desirable
E
Extended
t d dC Collection
ll ti C Cycle,
l
Higher than Industry Averages - Least Desirable

Consider why is client trading on extended terms (weak relationship,


masking prebill). Value of receivable degrades over time cash
velocity is key
Tools for General Evaluation of Inventory:
y

What makes up the Inventory?


How is it valued?
I there
Is th a ready
d market
k t for
f the
th Inventory?
I t ?
What must be done to prepare Inventory
for sale?
How long g is Inventory
y sales pprocess?
Application of Tools:

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

What must be done to prepare


Inventory for sale?
Completed
p and Ready
y for Shipment
p - Most Desirable
Assembly Required - Least Desirable
How long is Inventory sales process?
Immediate Buyers Available - Most Desirable
Extended Sales Process - Least Desirable
Tools for General Evaluation of Accounts
Receivable Agings:
Is the Aging in Detail or Summary?
What portion of the Accounts is Past Due?
Is there a concentration of Accounts due
from a limited number of Customers?
What is the Average Invoice Size on the
Aging?
Does Aging appear reasonable?
Application of Tools
Is the Aging in Detail or Summary?
Detail - More Information
Summary - Less Information

What portion of the Accounts is Past


Due?
LLess th
than 5 tto 10% - More
M D i bl
Desirable
Over 10% - Less Desirable
Is there a concentration of Accounts
due from a limited number of
C t
Customers? ?
Reasonable number of Customers - Most Desirable
High
Hi h llevels
l off smallll C
Customers
t -L
Less D
Desirable
i bl
Very Limited number of Customers - Least Desirable
What is the Average Invoice Size
on the Aging?
Sizable but manageable Invoice Size
($1,000-$20,000) - Most Desirable
Small
S ll IInvoice
i SiSize ((<$250)
$250) - Less
L D
Desirable
i bl
Extremely Large Invoice Size
($50 000 $100
($50,000, $100,000
000 plus) - Least Desirable
Does Aging appear reasonable?
A
Are unpaidid accounts
t lleft
ft on Aging
A i ffor
significant periods(>six months) - Undesirable
Is there evidence of continuing to sell to
slow
l pay or problem
bl accountst - Undesirable
U d i bl
Do finance charges make up a sizable
sum on the Aging? - Undesirable
Is there evidence of significant
partial payments? - Undesirable
Is there evidence of significant credits,
credits
negative balances or other offsets? - Undesirable
Is there evidence of Contra Accounts? - Undesirable
Standard Ineligible Categories for Accounts
R
Receivable:
i bl

Accounts Over 60 or Credit Memos


90 Days from Invoice Governmental
Date Accounts
Cross Aged Foreign Accounts
Receivables Intercompany or
Receivable balances Affiliated Accounts
over predetermined Progress Billings
credit limit
Guaranteed Sales
Contra Accounts
Standard Ineligible Categories for Inventory:

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:

Last three fiscal yyear-end Financial Statements


(Balance Sheet and Income Statement)
Interim Financial Statements for the most
recent month available and comparable
Interim Financial Statements for the prior year
Detailed Accounts Receivable and Accounts
Payable Agings
Financial Projections if available
A Complete Financial Package for Factoring
Should Include:
Last two year end financial statements (balance
sheet income statement) and Interim
Personal financial statement on guarantor if a
full recourse facilityy
A/R and A/P aging, Cust Names & Addresses
Three sample invoices with back-up
back up paperwork
i.e. contract to purchase order, bill of lading, etc.
Debtor credit reports
p on top
p 5 debtors
Details of UCC position, potential subordinations
The income statement shows what has
happened in the business over a period of
time.
Relevant Definitions for Evaluation of the Income
Statement:
Income Earnings before
Cost of goods interest and taxes
Gross p
profit margin
g Interest
Operating Taxes
expenses Net profit after taxes
Net profit
p
Depreciation
Relevant Definitions for Evaluation of the Income
Statement:

Income includes all the income generated


by the business.
Cost of goods includes all the costs related
to the sale of products in inventory.
Gross
G profit i is the difference
fit margin
between revenue and cost of goods.
Operating expenses include all overhead and
labor expenses associated with the operations
of the business.
Net profit is the difference between gross profit
margin and total expenses.
Depreciation reflects the decrease in value of
capital assets used to generate income.
Earnings before interest and taxes shows the
capacity of a business to repay its obligations.
Interest includes all interest p
payable
y for debts,,
both short-term and long-term.
Taxes includes all taxes on the business.
Net profit after taxes shows the company's real
bottom line.
Tools for General Evaluation of the Income
Statement:
Is the Company making money?
Are Earnings Increasing or Decreasing?
Are Interim Earnings Consistent with Prior
Year?
Are Sales Increasing or Decreasing?
Have they included accrued expenses
What is the Gross Profit Margin
g and have there
been there significant changes in the Gross Profit
Margin or Operating Expenses?
Does management have an explanation for
Changes in the Earnings Profile, and does it
make sense?
If Projections are provided, do they make sense?
Application of Tools:
Is the Company
p y making
g money?
y
Yes, Healthy Earnings - Most Desirable
No, Significant Losses - Least Desirable

Are Earnings Increasing or


Decreasing?
Earnings Steadily Increasing - Most Desirable
Earnings Deteriorating - Least Desirable
Are
A Interim
I t i Earnings
E i Consistent
C i t t with
ith
Prior Year?
Yes, Earnings Profile Similar - Most Desirable
No, Significant Earnings or Losses
in Comparison - Least Desirable
What is Gross Profit Margin
g and have
there been significant changes in
GPM and Operating Expenses?
Healthy, Consistent Gross Profit
Margin and Operating Expenses - Most Desirable
Small or Inconsistent Gross Profit
Margin and Operating Expenses - Least Desirable
Does management have an
explanation for Changes to the
g Profile,, and does it make
Earnings
sense? In other words, does
management understand the business?
Comprehensive, Reasonable
Explanation - Most Desirable
Limited Understanding of Business
Dynamics - Least Desirable
If Projections
P j ti are provided,
id d do
d they
th
make sense?
Reasonable and Obtainable with
Achievable Dynamics - Most Desirable
Pie in the Sky, Hope as a
Strategy - Least Desirable
The Balance Sheet is a financial picture
off th
the b
business
i as off a particular
ti l point
i t in
i
time.
Relevant Definitions for Evaluation of the Balance
Sheet:
The top portion of the balance sheet lists assets in order
of liquidity.
Current assets cash or cash equivalents or assets that will be
used in the business in a year or less
Cash is cash on hand.
Accounts receivable are short term obligations due to the
company arising from sale or lease of goods or services.
Inventory is goods for sale or lease
lease, or goods used in production
of goods for sale or lease.

"Total current assets" is the sum of cash


cash, accounts
receivable, inventory and supplies
Long-term or fixed assets are assets that are durable and will last
more than one year
Fixed
Fi d A Assets or P
Property, Pl
Plant, and
dEEquipment
i iis the
h bbook
k value
l off
all capital equipment and owned real property, less depreciation.
Investment includes all investments owned by the company that
can'tt be converted to cash in less than one year
can year.
Miscellaneous assets that are all other long-term assets that are
not fixed assets" or "investment.

"Total long-term assets" is the sum of fixed assets,


investments, and miscellaneous assets.

Total assets" is the sum of total current assets and total


long-term assets.
The bottom portion of the balance sheet lists liabilities in
order of maturity.
y
Current Liabilities debts that are due in one year or less
Accounts payable include all costs incurred by the business that
are related to p
purchases from regular
g creditors on an open
p
account and are due and payable.
Accrued liabilities are all expenses incurred by the business that
are required for operation but are not yet due at the time the
books are closed
closed.
Notes Payable is any obligation due to a Lender and payable in
one year or less.
Taxes are amounts owed for all taxes that are still due and
payable at the time that the books are closed.

"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

Debt to Worth or Leverage


= Liabilities/Net Worth

Lower leverage = Stronger Company


Tools for General Evaluation of the Balance Sheet:

Does the Company have a Positive or Negative


N tW
Net Worth/High
th/Hi h or L
Low L
Leverage?
?

Do Receivables, Inventory, and Accounts


Payable Look Consistent with Sales Levels?
Does The Company Have Significant Long
Term Debt?

Do Accounts Receivable and Inventory appear


sufficient to support the financing need/request
at an appropriate margin?

Are there unusual items on the Balance Sheet


(large Employee Receivables, large Accrued
Taxes, non-business Assets or Liabilities, etc)?
Application
pp of Tools:

Does the Company


p y have a Positive or
Negative Net Worth/High or Low
Leverage?
High Net Worth/Low Leverage - Most Desirable
Deficit Net Worth/High Leverage - Least Desirable
Do Receivables,
Receivables Inventory,
Inventory and
Accounts Payable Look Consistent
with
ith S
Sales
l L Levels?
l ?
Consistent with stated A/R and
A/P Terms
T - Most
M t Desirable
D i bl
Turns well past stated A/R and
A/P Terms - Least Desirable
Does The Company Have Significant
g Term Debt?
Long
Little or No Long Term Debt - Most Desirable
Significant Term Debt - Least Desirable
Do Accounts Receivable and/or
Inventory appear sufficient to support
g need/request
the financing q at an
appropriate margin?
At conservative margin,
margin Excess
Availability is indicated - Most Desirable
Financingg need much ggreater
than Accounts Receivable and
Inventory can support - Least Desirable
Are there unusual items on the
Balance Sheet (large Employee
Receivables, large Accrued Taxes,
non- business Assets or Liabilities,
etc)?
All Items on Balance Sheet appear
relevant
e e a t to bus
business
ess ope
operations
at o s - Most
ost Desirable
es ab e
Strong evidence of non-business
items on Balance Sheet - Least Desirable
De-Leveraging Impact of True
F t i (Before)
Factoring (B f )
Assets Liabilities
C h
Cash 100 A
Accruals
l 100

Fixed Assets 300 Short-Term Loan 400

Receivables 500 Long-Term Loan 100

Other 100 Loan Payables 300

Capital 100

Total 1,000 Total 1,000

Leverage 9:1
De-Leveraging Impact of True
F t i (After)
Factoring (Aft )
Assets Liabilities

Cash 100 Accruals 100


Fixed Assets 300 Short-Term Loan 0

Receivables 100 Long Term Loan


Long-Term 100
Other 100 Loan Payables 300
p
Capital 100

Total 600 Total 600

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

Debtor in Possession Financing in


Bankruptcy

Super Priority Lien


Factoring vs Line of Credit
Own vs Loan
True Factor is Bankruptcy Remote
Greater Control for Factor on:
Paper Review
Debtor Review
Progress
g Review
Usually able to maximize advances
Facility able to grow with A/R
Opportunity based finance, less reliance on capital
MODULE 4:
DUE DILIGENCE
Purpose
p

To look at the initial due diligence


g that
should be done from the time a lead is
received to the time that a p proposal
p is
issued, and from the time that a proposal
has been executed through g closingg of a
transaction.
Goals
At the end of this Module, Participants will:
Know what questions to ask when making
an initial evaluation of a prospective
borrower client
borrower, client, or transaction.
transaction
Know what written information should be
obtained
bt i d ffrom th the b
borrower b before
f a
proposal letter can be written or issued.
Know how to evaluate the information
received.
received
Know what additional due diligence must
be done between the date that the
proposal is executed and the closing of
the loan or factoring transaction
transaction.
The Ideal Prospect

What you are looking for:


an honest person (or people), who
run(s) a company that sells quality products,
to
creditworthy
dit th customers.
t
Preliminaryy Evaluation of a Lead
What kind of business are they in?
How long has the company been in business?
How is the company owned?
Are the principals active?
If not, how long has management been
involved?
What kind of businesses does the prospect
sell to?
Who are the largest customers, and how large?
What are the annual sales of the company?
How much does the company have in accounts
receivable?
Who is the company financing with presently?
Whyy are theyy looking
g to change
g lenders?
Is there a deadline involved in making a
change?
What is the company looking for in terms of the
financing?
What do yyou plan
p to do with myy money?
y
A word of caution, however dont
assume that the prospect is being
strictly honest! Get back-up for
everything you can.

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:

Accounts receivable analysis


Accounts Payable analysis
Analysis of accrued liabilities as potential
offset to collateral
Payroll tax analysis
Financial statement spreads and comparative
information
Cash flow analysis
y
Cash receipts and disbursements review and
reconciliation
Inventory analysis
o o
Borrowingg base aand
d sou
source
ce a
and
d use ca
calculations
cu at o s
Invoice and credit memo tests
Legal
g Due Diligence
g

The Uniform Commercial Code treats


sales of accounts receivable to a factor
the same way it treats the granting of a
security interest in accounts receivable
by a borrower to a lender
lender.
Elements of Legal Due Diligence:
Uniform Commercial Code and other lien
searches
Articles of Incorporation
p or other charter
documents
By
By-laws
laws or operating agreements
Interests of third parties, such as landlords
Individual
I di id l bbackground
k d checks
h k
Common Sense
Does the financial information Im getting make
sense?
When I ask a question or point out a
discrepancy, do the prospects answers/
explanations seem likely?
What is my exit strategy from this transaction?
D
Does the
h iinformation
f i I am receiving
i i support that
h
exit strategy?
Does
D th
the package
k pass th
the SMELL TEST?
Due Diligence for Factoring
Collateral
Turns Trends
Average Dilution
Delinquency Sales
Turnover
Account Debtor Base
Provisions Restricting Assignment of
Receivables
Contract Non-Assignability
g y Trusts
vs
Payment Non-Assignability
Specialty Industries
Government
Agencies All Payments are
Assignable Unless
under F.A.R.
Elements of a Good Paper-trail
p

Purchase Order or Bill of Lading/Delivery


Contract or Time Ticket
Invoice No Future
Performance
Required
Essential Elements for Purchase Orders &
Contracts
Product or Service Acceptance &
When Billable Delivery
Payment Terms & Freight
Conditions Insurance
Transfer of Title
Presentation to Pay Discounts Offered by
Other Agreements Seller
or Addendums Buying or Contracting
Industry Specific Parties
Contract/P.O. Cancellation or
Numbers on Termination
Documents
Notification to Proper Arbitration
Parties Credit
Venue Authorized Signatures
Invoices
Terms of Invoice Matching Invoices
Due Date Against
g Supporting
pp g
Allowance for Documentation
Discounts,, Shipping,
pp g, Preparing and Mailing
Etc Invoice
Support Documentation
Bill of Ladings Various Proof of
Delivery
D li Ti
Tickets
k t and
d Completion for
Proof of Delivery Service Industries
Compared to Bills of Time and Material
Lading Forms
Proper Debtor Sign-
Sign
Offs
Proper
p Debtor Sign-Offs
g
Whos Authorized Set-off, Additional
to Sign?
g Terms or Dispute
p
Can You Read Procedures Listed
Their Name? above Signature
g
Contact Line?
Information for
Signor?
Bad Qualityy Paper
p
Milestone Billing Warranty Issues
Progress Billing Maintenance
Bill and Hold Agreements
Pay when Paid Vendor,, Distributor,, or
Consignment Sales License Agreement
Guaranteed Sales Future Guarantees
Certification
Fraud
Green-billing Duplicate Billing
Re-billing Billing for Extras
Over-billing Fraudulent Billing
MODULE 5:
SALESMANSHIP
Purpose

To provide an overview of the process of


selling your company's financial products
to prospective borrowers.
Goals
At the end of this Module, Participants will:
Understand the sales process.
Know how to identify, target and qualify
referral sources, and how to develop those
sources.
Be better prepared to evaluate and to
interact effectively with prospects.
Be better able to evaluate the results of
their sales efforts.
What is Selling?
Selling is a process of moving goods and
services from the producer to the consumer
Selling involves persuasive skills on the part of
the seller
Selling is supported by print, audio, video, direct
mail, etc. Product Knowledge

The selling triangle:

Selling tactics and strategies Attitude, Enthusiasm, Goals


The 7 Step Selling Cycle

Prospecting Addressing Concerns


Original Contact Closing the Sale
Qualification Getting Referrals
Presentation
Bank Referral Sources
Get to know the Bank

Regional Bank in Your


Area

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

Step one get to know the prospect's people


and plant

Step two understand the prospect's financing


needs

Step three add value


Value Added Asset Based Lending
Cash management services.
The option to finance inventory as well as
receivables.
Improved ability to obtain equipment financing
financing.
If your institution offers it, the option to finance
equipment purchases directly with you you.
If your institution offers it, the option to include a
term loan supported by the value of fixed assets.
Value Added Factoring
Opportunity based finance
Ongoing
g g credit evaluation of clients customer base.
Complete receivables management services,
including invoicing.
Complete receivables collection services.
Detailed reporting regarding the status of the
accountt and d th
the clients
li t customers.
t
If your institution offers it, the option to finance
receivables on a nonnon-recourse
recourse or limited recourse
basis.
Top Ten Keys to Success
1. Develop a positive 6. Get involved in your
attitude
ttit d communityit
2. Set goals and make a 7. Be memorable in all that
commitment to achieve you do
them 8. Help other people
3. Stay focused and look 9. Establish long-term
for opportunities relationships with
4. Design a networking everyone,
plan and implement it and above all,
all
5. Be a leader 10. Have fun!
MODULE 6:
OPERATIONS
PURPOSE

To provide an overview of the day


day-to-day
to day
operations of a typical asset based lender and of
a typical factor
factor.
Goals
At the end of this Module, Participants will:
Have a better understanding of the way an asset
based lender receives reports on and monitors
accounts receivable and inventory collateral
collateral.
Have a better understanding of the way a factor
purchases and monitors accounts receivable
receivable.
Understand the mechanics of funding for an
asset based borrower and for a factoring client
client.
Understand how an asset based borrower
collects accounts and how the lender controls
the cash generated by collections.
Understand how a factor collects the accounts
receivable it buys from the client.
Receivables Availability
Total Accounts Receivable minus Ineligible
Accounts Receivable = Eligible
g Receivables
Eligible Receivables multiplied by Receivables
Advance Rate = Receivables Borrowing Base
Receivables Borrowing Base plus Inventory
B
Borrowing
i B Base = T
Total
t l Borrowing
B i B Base
Total Borrowingg Base minus Outstanding
g
Principal = Availability
Supporting Documentation
Back-up information supporting accounts
receivable included in an asset based lending
g
borrowing base may include:
Sales journal or invoice register
Copies of some or all invoices
Copies of some or all proof of delivery
documents
For a service business, time cards,
customer sign-offs or purchase orders
Factoring The Schedule of Accounts
The schedule will typically include:
A list of receivables to be factored
The invoice date for each receivable listed
The amount of each receivable listed
The name of debtor for each receivable listed
The total amount to be funded under the
schedule
The schedule is signed by a responsible party
who
h attests
tt t that
th t the
th receivables
i bl are valid,
lid ffree off
disputes and not subject to any offsets
Back-Up Information
Back-up information for receivables scheduled
to be factored may include:
Copies of invoices
Copies of contracts or purchase orders
Copies of material evidencing delivery or work
completion such as bills of lading, time tickets
and engineering signoffs
The Right Factoring System

Daily Aging by Client


Daily Aging by Debtor
Daily Aging by Invoice
Funds Employed by Client
Daily summary of collections, wires, charges
Support for borrowing base
Debtor Approvals
Obtaining Debtor Credit Risk Options
Information Grid Modeling
Establishing Credit Credit Insurance
Li it
Limits Pros and Cons
Building Debtor
Fil
Files
Sources of Debtor Information
Credit Applications, if Internet searches
the client requires Third party credit
them references
Dunn
D &BBradstreet
d t t Industry specific
SEC filings credit associations
Equifax, Experian, Payment histories
TransUnion, NACM
New
N sources
Building Debtor Files
A debtors file will typically include:
Financial statements
Credit reports
Payment history
Bank references
Trade references
DSO calculation
High credit
Aging analysis
Verifications of Accounts
A good verification should include:
Invoice amount (or open account balance to
cover all open invoices)
Invoice dates
Received dates
Confirmation of quantities
Confirmation
C fi ti off no ddamage tto th
the product
d t
If a service, that the service was completed
properly and on time
Tentative payment date.
Any discrepancies should be dealt with
immediatelyy and the borrower should be
informed where appropriate.

Written verification or telephone verification?


Cash Management Options
Direct notification
Hard
H d notification
tifi ti
Soft notification
Lock box
Blocked account arrangement
g
Springing blocked account arrangement
Borrower controls cash
Inventory Availability
Total Inventory minus Ineligible Inventory =
Eligible Inventory
Eligible Inventory multiplied by Inventory
Advance Rate = Inventoryy Borrowing g Base
Accounts Receivable Borrowing Base plus
Inventoryy Borrowing
g Base = Total Borrowing
g
Base
Total Borrowing Base minus Outstanding
Principal = Availability
Field Exams
Field exams are important for many reasons:
Verifying collateral information previously
presented,
Confirming g how a borrower is doingg from a
financial perspective,
g face to face time with the borrower to
Getting
determine what, if any, pressure the borrower
is under from creditors,
Looking through the warehouse and talking to
some of the lower level people of the borrower
to determine anyy unreported
p issues,,
and
Confirming that the borrower is adhering to the
terms and conditions of the loan agreement
with the finance company.
Scope of the Audit Work
Reconciling the borrowers accounts receivable
aging to the finance companys
company s control or aging
total;
Reconciling g the borrowers collections to ensure
all collections are being properly remitted and
reported to the finance company;
Calculating a borrowing base certificate,
certificate to
include the borrowers ineligibles, to ensure the
borrower is reporting
p g information correctlyy to the
finance company;
Reviewing accounts payable for significant
vendor pressure;
p
Reviewing payroll tax reports to ensure all taxes
are being paid timely;
Performing financial comparative analysis vs.
prior periods;
When lending on inventory, a detailed review of
the inventoryy to ensure it is being g reported
p
accurately and a visual inspection of it; and
When lending on equipment, a visual inspection
of it to ensure it is still present and appears to be
in good working order.
COURSE EVALUATION

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