Factoring: Modern American Style

1. Factoring:Modern American Style Factoring Industry as a Key Tool for SME Development in EU Accession Countries Presented for The World Bank in Warsaw, Poland October 23-24, 2003

2. Factoring accounts receivable, used for the right reasons with the right factor, is one of the most constructive tools available with which to build and maintain a healthy business. • Used for the wrong or right reasons with the wrong factor, it is quite the opposite.

3. Factoring is… • Dichotomous • at the same time both simple and complex • Amorphous • without definite form • Anomalous • being, or seeming to be, inconsistent or contradictory • Metamorphic subject to change in form or substance

4. Adding to the difficulty of defining and describing factoring as practiced in modern day America is that it is unregulated without government or industry standards for entry or performance. • The absence of regulation is a two-edged sword with both a good and bad side.

5. When it comes to financial relationships, lending is like flirtation whereas factoring is like a marriage.

6. Old Definition “…a continuing arrangement between a factoring concern and the seller of goods or services on open account, pursuant to which a factor performs the following services with respect to the accounts receivable arising from sales of such goods and services: • Purchases all accounts receivable for immediate cash. • Maintains the ledgers and performs other bookkeeping duties relating to such accounts receivable. • Collects the accounts receivable. • Assumes the losses which may arise from the customer’s financial inability to pay (credit losses).” Carroll G. Moore, ‘Factoring – A unique and Important Form of Financing and Service’, The Business Lawyer (1959) Vol. XIV, No. 3

7. Modern Definition “The purchase of debts (other than debts incurred for goods or services purchased by a debtor for his personal, family, or domestic use and debts payable on long terms or by installments) for the purpose of providing finance, or relieving the seller from administrative tasks, or from bad debts, or for any or all of such purposes.” The Law and Practice of Invoice Financing, Third Edition, by Freddy Salinger of the United Kingdom

8. Brief History of Factoring • Historians generally conclude that factors originated as commissioned agents who facilitated the sale and movement of goods about 2000 years ago during the days of the Roman Empire. • With the worldwide growth of the English textile industry in the 14th and 15th centuries came a growth in the importance of factors. By the time Columbus discovered America in 1492, factors had evolved from the sole role of providing marketing functions to the dual role of providing both marketing and financial functions. • The 16th century saw the beginning of the colonization of America and with it came increasing importance and new opportunities for factoring, particularly for those who established operations in America.

9. Brief History of Factoring • By the late 19th century, the American colonies had evolved into a sovereign nation. • America, faced with a rapidly growing population and workforce, focused on developing its own natural resources which was further fostered by the imposition of restrictive trade tariffs on foreign goods. • As American manufacturing expanded early in the 20th century to include apparel and accessories, furniture, and carpet, American factors also expanded their expertise and services to include these new industries. • By the middle of the 20th century, American factoring evolved to include new and developing industries such as electronics, chemicals, and synthetic fibers.

10. Advantages of Factoring • Reduction of fixed cost overhead of staff and physical facilities. • Conversion of expenses of credit, collection, and bookkeeping to variable expenses tied to sales. • Availability of the expertise of competent and experienced personnel on an as needed basis. • Improvement of financial ratios such as cash flow from operations, debt to equity, days sales outstanding, return on equity, return on assets, and earnings per share. • Supporting growth without added debt or equity. • Taking advantage of supplier discounts. • Meeting inventory demands. • Funding acquisitions or buyouts. • Capitalizing on large opportunities.

11. Advantages of Factoring • Meeting seasonal funding needs. • Maintaining or improving credit ratings. • Transferring credit risk. • Ability to offer extended credit terms to customers. • Collection services. • Detailed management reports. • Access to e-commerce and state of the art technology. • Private labeling capabilities. • Foreign language/in country presence. • Local/industry knowledge • Enhanced cash flow. • No compensating balances required.

12. Mechanics of Factoring • To best understand the mechanics of factoring, it is beneficial to analogize it to the credit card industry with which most people have been involved to some degree or another.

13. Customer (Debtor) 3rd Parties Factor Client 2) Submit Order for Credit Approval 5) Invoice ($100) Factoring Transaction Flow Ongoing Process Credit Information • 7) Day 30: • Invoice Paid ($100) • 6) Day 1: • Purchase Invoice • @ 2% Discount 5) Invoice ($100) 3) Issue Credit Approval 4) Ship Product 6) $78 - Day 1 1) Issue Order 8) $20 - Day 31 • 6) Day 1: • 80% Advance • sent to Client Ongoing Process: Reports • 8) Day 31: • Balance of Invoice • paid to Client

14. Recent Developments • Franchising of Community Based Factors Throughout the United States and Canada

15. Q&A Presented by Richard G. Worthy, President Metro Factors, Inc. 8144 Walnut Hill Lane, Suite 900 Dallas, Texas 75231 USA 214.987.7310 | fax 214.346.1084 rworthy@metrofinancial.com www.metrofinancial.com