Factoring (BUSINESS BORROWING BASICS 2018)

Practical and entertaining education for
attorneys, accountants, business owners and
executives, and investors.
2

THE NEW YORK
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The material in this webinar is for informational purposes only. It should not be considered
legal, financial or other professional advice. You should consult with an attorney or other
appropriate professional to determine what may be best for your individual needs. While
Financial Poise™ takes reasonable steps to ensure that information it publishes is accurate,
Financial Poise™ makes no guaranty in this regard.
While Financial Poise is happy to make this PowerPoint freely available to all, the reader is
cautioned that it was created for use as part of a webinar that featured an extensive verbal
discussion of the topics addressed in the PowerPoint. It was not designed to be read by
itself. Financial Poise webinars can be purchased at www.financialpoise.com. You may also
receive offers for free webinars by subscribing to Financial Poise's DACyak, a free weekly
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DISCLAIMER
5

MEET THE FACULTY
MODERATOR:
Jonathan Friedland Sugar Felsenthal Grais & Helsinger
PANELISTS:
Paul Clinkscales Aesir Media Group
Harvey Gross New York Institute of Credit
Avi Levine Star Funding, Inc.
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ABOUT THIS WEBINAR
A simple way to think about factoring is to think of it as a company selling its invoices or accounts receivable
(A/R) to a third party. It is not that simple, however, thus the purpose of this webinar.
A factor makes a profit by buying A/R for less than 100% of its face amount. Companies that transact with factors
are often cash-strapped. A factor will typically advance most of an invoice amount – usually between 70% - 90%.
When the invoice is paid, the factor will remit the balance the company, less a transaction fee. This arrangement
allows a company to get cash much faster than it would if it waited to be paid pursuant to the terms of its invoices
(i.e. often 30 days) and even faster if its customer fails to pay within terms. This webinar discusses various
common types of factoring arrangements; how to negotiate a factoring agreement; and alternatives to consider
before deciding to factor.
This webinar is delivered in Plain English, understandable to you even if you do not have a background in the
subject. It brings you into an engaging, even sometimes humorous, conversation designed to entertain as it
teaches. And, it is specifically designed to be viewed as a stand-alone webinar, meaning that you do not have to
view the other webinars in the series to get a lot out of it. 7

ABOUT THIS SERIES
Many companies, and most of any size, use borrowed funds as part of their capital structure. Depending on
the nature of the business, its size, time in business, whether it has adequate collateral, and other factors, a
business has myriad options when borrowing funds.
This webinar series provides a guided tour of the various borrowing options available to businesses, from both
a business and legal perspective. Major topics covered include asset-based lending, P/O Finance, Factoring,
Merchant Cash Advances, and Market Place Lending / Fintech. Learn the advantages and disadvantages of
each, tricks of the trade when negotiating these arrangements, and more!
As with every Financial Poise Webinar, each episode is delivered in Plain English understandable to investors,
business owners, and executives without much background in these areas, yet is also valuable to attorneys,
accountants, and other seasoned professionals. And, as with every Financial Poise Webinar, each episode
brings you into engaging, sometimes humorous, conversations designed to entertain as it teaches. Each episode
in the series is designed to be viewed independently of the other episodes, so that participants will enhance
their knowledge of this area whether they attend one, some, or all episodes.
8

Dates shown are premiere dates; all episodes will be available on demand
after their premiere date.
EPISODES IN THIS SERIES
EPISODE #1 Understanding the Lending Landscape 1/17/2018
EPISODE #2 Asset-Based Lending 2/21/2018
EPISODE #3 Purchase Order Finance 3/21/2018
EPISODE #4 Factoring 4/18/2018
EPISODE #5 Merchant Cash Advance 5/23/2018
EPISODE #6 Market Place Lending / Fintech 6/20/2018
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WHAT IS FACTORING?
• Financial transaction in which business (the borrower) sells its invoices,
or receivables, to third-party financier known as a “factor”
• Factor then collects payment from the business’s customers
• Also known as “accounts receivable financing,” and “invoice factoring”
© 2018 by DailyDAC, LLC d/b/a Financial Poise Webinars™ 11

FACTORING VS. ASSET-BASED LENDING
• Factoring is a type of asset-based financing, often confused with asset-
based lending
• An asset-based loan is a loan or line of credit that secured using
company assets as collateral
o Collateral used for reserve is usually accounts receivable, inventory,
equipment, etc.
• Factoring is a type of business financing in which a factoring company
purchases accounts receivable for immediate cash payment from the
factor
o May look like revolving line of credit, but is actually a receivables
sale © 2018 by DailyDAC, LLC d/b/a Financial Poise Webinars™ 12

(CONT.)
• When to consider factoring v. asset-based loans
• Asset-Based Lending
o Rapid business growth – good product or service with high leverage
o Troubled companies – could be helpful for a turnaround plan
o Slower process
o Business has history and credit rating

(CONT.)
• Factoring
o Rapid growth – good for start-ups or small businesses who need
working capital immediately, but do not have valuable collateral
to secure a loan or credit history
o Troubled companies – could also be helpful for a turnaround
plan, gives immediately liquid cash
o Quicker process

FACTORING – BASIC STRUCTURE
• Factoring company purchases business’s accounts receivable.
• Notification letter to customer (if notification factoring)
• Business receives an initial advance from the factoring financier
(“lender”) - usually about 80% of the amount of an invoice
purchased by the lender.
• When accounts receivable is collected or paid by the customer,
remaining 20% (less a fee) will be paid to borrower

FACTORING – BASIC
STRUCTURE (CONT.)
Note: reference to “Client” here is to
the customer of the borrower. That
is, the customer of the entity that is
factoring its receivables. This is
despite the fact that the more
common convention is to refer to
borrower’s customer as the
“Customer” and to refer to the
borrower as the “Client” (that is, the
Client of the Factor.
SOURCE: https://fitsmallbusiness.com/how-invoice-factoring-works/

BENEFITS OF FACTORING
• Benefits
o Faster process than traditional lending
o Not a loan, so no negative effect on debt-to-equity ratios of
company
o Fewer disclosure requirements, due diligence process vs. bank
o May avoid personal guarantees

CHALLENGES OF FACTORING
• Challenges & drawbacks
o Requires discounting accounts receivable for benefit of factor
o Typically more expensive than traditional loan
o Customer payments directed to factor bank account
o More administrative and bookkeeping burden on business
o Requires assignment of invoices to factor – may affect customer
relations

FACTORING – HOW IT WORKS
• Company invoices customers in the ordinary course of its business
• Identifies need for immediate cash
• Company/prospective borrower applies for factoring
• Factoring company (the “factor”) conducts diligence relating to
recoverability of accounts receivable & customers’ creditworthiness
• Parties enter into factoring agreement governing terms of
relationship
• Factor funds to company at agreed amount of discount from invoices
purchased (often 80%)
• Customers pay invoice directly to factor, or to separate trust account
held in name of company

FACTORING – HOW IT
WORKS (CONT.)
Note: reference to “Client” here is to
the customer of the borrower. That
is, the customer of the entity that is
factoring its receivables. This is
despite the fact that the more
common convention is to refer to
borrower’s customer as the
“Customer” and to refer to the
borrower as the “Client” (that is, the
Client of the Factor.
SOURCE: https://fitsmallbusiness.com/how-invoice-factoring-
works/

FACTORING APPLICATION PROCESS
• Borrowers must submit applications for factoring, usually
including:
o Accounts receivables/ payable aging report
o Articles of organization or incorporation
o Invoice information
o Company history
o Target markets
o Current clients
o Billing process
o Current and expected revenues, etc.

FACTOR CONSIDERATIONS & DUE DILIGENCE
FOR APPLICATIONS
• Each factor has set specific requirements for eligibility
• Common minimum requirements
o Actual business operations – sole proprietorships and
partnerships included;
o Commercial or government customer base–
 Note: factoring companies often do not buy invoices from
retailers
o Good customer credit
o Profit margins typically above 10% (varies based on the factor)

FACTOR CONSIDERATIONS & DUE DILIGENCE
FOR APPLICATIONS (CONT.)
• Applicant should not have any liens or encumbrances on accounts
receivable;
o Includes IRS tax liens
• Applicant not in bankruptcy (unless part of DIP financing)
• Applicant subject to background check

CONSIDERATIONS – NON-RECOURSE V.
RECOURSE FACTORING
• Presuming application is approved, considerations for factor as to
whether agreement will be recourse or non-recourse
• Recourse Factoring
oMost common
oBorrower agrees to pay “bad debts” in full to the factor
oIf reserve falls short of total “bad debts,” factor is entitled to
reimbursement in full by borrower

RECOURSE FACTORING (CONT.)
1. Non-Recourse Factoring
• Factor may set off the sum retained as a reserve, if any, against any
“bad debts” that may arise
• Factor not entitled to be reimbursed by the originating company
(borrower) if the total of “bad debts” exceeds the amount of reserve.
• Typically involves higher discount rate

RECOURSE FACTORING (CONT.)
SOURCE: https://ezfreightfactoring.com/recourse-vs-
non-recourse-factoring

EXAMPLE: NON-RECOURSE V. RECOURSE
1. Facts:
• On January 1, 2018, Cash-Strapped Inc. (“company”) factored its
accounts receivable of $100,000 at a fee of 8%
• Under terms of agreement, company receives $82,000 in cash
• Remainder retained by factor as reserve for any “bad debts” that
may arise
• Parties agree that any excess of reserve sum over the total bad debts
will be returned by factor at the end of the accounting period -
December 31, 2018
• On December 31, 2018, total reserve sum withheld by factor
attributable to actual “bad debts” totaled $11,000 - exceeding the
reserve sum.
• How will money be distributed?

(CONT.)
1. Under recourse factoring arrangement:
• Company. must pay factor additional $1,000 because bad debt
exceeded reserve.
• Accounts receivable value - $100,000
• Cash to Borrower - $82,000
• Factoring expense – 8%, $8,000 (100,000 x 0.08 = $8,000)
• Reserve retained by lender = $10,000 ($100,000-$82,000 =
$18K)
• $18,000 - $8,000 (factoring fee) = $10,000 remaining
reserve.
• $11,000-$10,000 = ($1,000) (owed by borrower to lender)

(CONT.)
Under non-recourse arrangement:
• Company owes nothing to factor if customers do not pay debts
• Factor then owes company $10,000 - return of the reserve sum.

NEGOTIATING NON-RECOURSE V. RECOURSE
FACTORING
o Recourse Factoring
 Most common, lowest risk for factor:
 May cover all kinds of industries:
• businesses are awarded government contracts
• textile and clothing manufacturers
• construction companies, etc.

NEGOTIATING NON-RECOURSE V. RECOURSE
FACTORING (CONT.)
o Non-Recourse Factoring
 Higher risk to factor, company seeking non-recourse only likely to
be able to negotiate if business has small collection of large
customers with good credit
• e.g. trucking companies, federal, state or local governments.

NOTIFICATION V. NON-NOTIFICATION
FACTORING
1. The factor typically will require the company to notify its customers
about its invoice financing arrangement, typically via a notice of
assignment. The company must ask its customers to assign all future
receivables to the factoring company. In other words, the customer
pays the factor directly.
2. In non-notification factoring, the customers are not notified that the
company sold and assigned the receivables. The customer pays the
company and the company redirects the customer’s payment to lock-
box controlled by the company and the factor.
3. Factoring is primarily handled on a notification basis.

ALL SALES V. PARTIAL SALES V. SPOT
FACTORING
1. All sales factoring
2. Partial sales factoring – Allows companies to choose which
invoices to finance.
3. Spot factoring – Allows companies to access the funds from one
invoice without entering into a long-term relationship with the
factoring company.

EXPORT FACTORING (A/K/A INTERNATIONAL
FACTORING)
1. Advantages of Export Factoring –
• Increased sales in foreign markets by offering competitive terms of
sale
• Liquidity to boost working capital
• Enhanced borrowing potential
2. Disadvantages of Export Factoring
• Enforceability of notification in notification factoring
3. Factors Chain International (FCI) – a global network of commercial
finance companies that aims at facilitating international trade through
commercial finance. It involves about 80-100 countries.

FACTORS V.
BANKS
© 2018 by DailyDAC, LLC d/b/a Financial Poise Webinars™
35
SOURCE: https://www.slideshare.net/Ucfunding01/invoice-factoring-
alternative-to-traditional-bank-loan

JONATHAN FRIEDLAND
jfriedland@sfgh.com
Jonathan Friedland is a Partner with Sugar Felsenthal Grais & Helsinger, LLP, with offices in Chicago and New York.
regularly advises private funds in their M&A activity and private companies in their day-to-day affairs. Jonathan has
experience in guiding companies and their boards through a variety of challenging situations, including in Chapter 11 and
insolvency regimes.
Jonathan graduated from the SUNY Albany, magna cum laude, in 1991 (after three years of study) and from the University
Pennsylvania Law School in 1994. He clerked for a federal judge before entering private practice. He was an Adjunct
Strategic Management at the University of Chicago’s Graduate School of Business for several years and was the 2006
for Entrepreneurial Law Visiting Professor of Business Law at the University of Tennessee College of Law. Jonathan has
interviewed, and/or quoted in numerous publications, including Buyouts Magazine; Smart Business Magazine; The M&A
Inside Counsel; LAW360; BusinessWeek.com; The Bankruptcy Strategist; Dow Jones Daily Bankruptcy Review;
Decisions; Dow Jones LBO Wire; and The Daily Deal. Jonathan is also lead author and editor of several significant
chapters in other treatises, and hundreds of articles on law and business. Jonathan holds the highest possible rating from
Martindale-Hubbell (AV® Preeminent™) and AVVO (10/10), has been repeatedly recognized as an Illinois “superlawyer” in
multiple areas of practice, including Business/Corporate Law and Bankruptcy & Creditor/Debtor Rights, has been named
times as a “Leading Lawyer” by Leading Lawyers Magazine, and has received several other similar distinctions. He is
founder of DailyDAC/Financial Poise.
© 2018 by DailyDAC, LLC d/b/a Financial Poise
Webinars™
36

PAUL CLINKSCALES
pac.cpa@sbcglobal.net
Mr. Clinkscales has held various roles as a seasoned executive leader and business advisor. He currently
serves as Director of Finance & Operations for Aesir Media Group, a specialty niche television & film
content distribution concern.
He previously served as CFO, Director of Sunburst Digital/Ignite Learning, a K-12 educational digital
content group; and as a special situations business consultant to select start-ups and private companies.
Mr. Clinkscales started his career with Price Waterhouse Coopers. Over the past 30 years, he’s advised
and served in senior management positions covering finance, accounting, tax, administration, legal,
insurance, general business and human resources for private companies, including high-tech, software,
media, insurance, education and real estate. He spent 3 years in Europe as Finance Director for a private
technology company. He has successfully led lender/vendor relationships, private debt and equity financing
activities as well as acquisitions and company liquidity events. He is a graduate of the University of Texas-
Austin and is a Certified Public Accountant.
© 2018 by DailyDAC, LLC d/b/a Financial Poise
Webinars™
37

HARVEY GROSS
info@instituteofcredit.org
Harvey Gross is the founder and president of HSG Services Inc. He was formerly a Vice President with NationsBanc where he was
wholesale credit manager, wholesale team leader and account executive. He supervised in sales, marketing and insolvency
recoveries.
Among Mr. Gross’s many roles: Member of the American Arbitration Association, Faculty of Parsons School of Design of New School
University, Current Board Member Turnaround Management Association – New Jersey Chapter, Past Chairman Turnaround
Management Association – New Jersey Chapter, Past Board Member of National TMA, Board of Directors – 475 Esquire Toppers
Credit Club, Past President of 475 Esquire Toppers Credit Club, Board Member Business- Exchequer- Metropolitan -111 Credit
Club, Managing Director of the New York Institute of Credit, Former Senior Vice President – Harborcove Financial LLC, Chief
Operating Officer and Executive Vice President – Cyber Security Auditors & Administrators LLC, Executive Director IFA Northeast
Chapter.
Mr. Gross is Past President of the Exchequer/Metropolitan Credit Club, the Uptown Credit Group and the American Credit Club. In
2000 he was honored by the B’nai Brith Banking and Finance Division with the Distinguished Achievement Award. In 2010 he was
awarded by the TMA … Outstanding Individual Contribution Award.

AVI LEVINE
levine.avi@gmail.com
Avi Levine currently serves as a Vice President at Star Funding, Inc., a New York based firm providing Purchase
Order Financing, Factoring, and other working capital solutions to lower middle market companies. With a focus on
trade finance, Star specializes in transactional based financing to help purchase or acquire goods for resale and/or
inventory purposes. Facility sizes can range from $500k-$15,000,000.
Levine entered the finance world in 2014 with the development and launch of an online lead generation tool for
commercial lenders. Shortly after launching this product he left his current employer and joined Star Funding. Avi
comes from a background of wholesale and consumer product companies. Understanding the financing needs of a
company from an insider’s perspective allows him to tailor financing programs that are truly aligned with a
borrower’s needs.
Serving as the president of the Contemporary Credit Club and as an active member of a number of commercial
finance organizations, Avi stays up to date with the latest trends in commercial and trade finance.

The material in this presentation is for general educational purposes only. It has
been prepared primarily for attorneys and accountants for use in the pursuit of
their continuing legal education and continuing professional education.
While Financial Poise is happy to make this PowerPoint freely available to all, the
reader is cautioned that it was created for use as part of a webinar that featured an
extensive verbal discussion of the topics addressed in the PowerPoint. It was not
designed to be read by itself. Financial Poise webinars can be purchased
at www.financialpoise.com You may also receive offers for free webinars by
subscribing to Financial Poise's DACyak, a free weekly newsletter.
IMPORTANT NOTES
40© 2018 by DailyDAC, LLC d/b/a Financial Poise Webinars™

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About Financial Poise™
www.financialpoise.com
DailyDAC LLC, d/b/a Financial Poise™ provides continuing education to
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audiences.
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