Understanding Client Due Diligence

11:56 10 January in Blog, Broker Resources

A key component of being a successful financial broker or independent sales office (“ISO”) is understanding the process that prospective clients go through once you identify and refer a client to a factoring company. 

The process, known as due diligence, is key in qualifying a client for an invoice factoring program and continuing to fund a client’s working capital needs on an ongoing basis. Understanding this process will ensure due diligence requests are handled smoothly, thereby increasing the likelihood of the client being approved and also saving you time, and helping you close more transactions.

In this article, we’ll review what due diligence is, what it entails, and why it is important to brokers for new and existing client relationships.

What Is Due Diligence?

Due diligence is the term given to an investigation that provides reassurance that a financial transaction is fair and true before completion.  Due diligence in invoice factoring involves the review of prospective clients’ financial, legal and other relevant business information to determine if they meet the factoring company’s criteria for funding their working capital needs.

Due diligence can differ depending on the type of business funding required. Clients may have gone through other due diligence processes for business loans, real estate mortgages, or other types of financing. The due diligence process for invoice factoring is less complicated and time-consuming than the process for other forms of funding.  Prospective clients should understand this difference. It will help them overcome concerns they may have and make the process easier for everyone concerned.

What Does Due Diligence for Invoice Factoring Entail?

With invoice factoring, due diligence represents one of the most important preliminary steps before proceeding with a transaction.  There is no one size fits all approach for client due diligence so certain aspects of the process may vary depending on the amount of funding required, the client’s industry, the complexity of the transaction, and other associated risks.  

The process begins with a client submitting the documents requested by the factoring company, in this case, Capstone. The documents requested usually include the following:

  • Factoring application – The application should be filled out as much as possible, without errors, and include any additional forms with all necessary supplemental documentation to avoid delays
  • Legal documents – The documents should include business formation documents, information on incorporation, lawsuits the client is a party to, outstanding judgments, tax issues, and liens
  • Business owners – Information on individuals that own the business/ are officers of the company, including copies of driver’s licenses or other personal identification.
  • Business offices, warehouses, and manufacturing locations – Addresses, descriptions, and other relevant information
  • Accounts receivable and accounts payable aging reports
  • Customer list – Information on contacts, location, sales volume, and payment history. The credit history and background of customers are reviewed. Customer credit history and financial strength are key factors in determining whether a factoring program is approved
  • Copies of invoices to be factored
  • Copies of contracts or purchase orders to match the invoices – Including supporting backup, bonds, and shipping document samples
  • Other information – Depending on the client’s industry and the complexity of the transaction, this may include a professional license, proof of insurance, etc.

Upon receipt of the application packet, due diligence material, and due diligence fee, Capstone will begin legal documentation due diligence, account underwriting, and file a UCC-1 lien on the business. 

Company searches and background checks are done to look for issues that may be problematic and require additional steps to resolve. Accounts receivable liens, bankruptcy, tax issues, and legal problems are examples of items that may require further action to clear them so that a factoring program can move forward. 

Capstone will review the nature of the client’s business and transactions along with the customers that are served. The client’s invoices must be for B2B transactions with creditworthy entities in order to be eligible for factoring. A verification step is also performed on the invoice to confirm the validity of the account receivable.   

Certain types of transactions may also not be eligible for factoring, including sales that are contingent on the client’s customer reselling the merchandise or being paid for the product and guarantees to return unsold inventory. In these situations, agreements with customers will need to be revised for the invoices to be factored.

Due diligence can be completed in a few days or require a week or more. It all depends on the state of the client’s business is formed in, the complexity of the client’s business or industry, and how prompt the client is in providing complete information and responding to questions.

Importance of Due Diligence

Due diligence in invoice factoring is essential for several reasons. Determining upfront if a client is suitable for invoice factoring saves brokers/ISOs from wasting valuable time onboarding prospects that cannot be approved. It also reduces the likelihood that clients will have problems after approval, which may require additional attention beyond the normal demands of an invoice factoring relationship. Understanding what due diligence entails will increase the speed and efficiency of the process, which can improve the likelihood of the client being approved. This is especially important if the transaction or client’s need for business funding is time-sensitive.

Factoring companies rely on due diligence to avoid problems and financial losses from relationships with clients that are not suitable for invoice factoring. The due diligence process is not designed to be harmful to either the client or the factoring company. Negative information found is very often shared to give the client the opportunity to explain what happened.   

Due diligence helps identify red flags, prevents fraud, reduces the risk associated with the transactions, and also helps to keep factors financially healthy so they can continue to provide working capital funding to qualified businesses. Identifying problems and risks and devising solutions to these issues helps manage the risk involved.

Due Diligence Is an Ongoing Process 

Due diligence is part of the ongoing healthy factoring relationship with a client. After a client is approved for an invoice factoring program, circumstances may change. Economic recessions, natural disasters, geopolitical events, pandemics, and other factors can negatively impact a client’s business and financial health. 

Factoring companies use a number of resources to monitor a client relationship on an ongoing basis. Keeping track of clients helps to ensure a healthy factoring relationship and alert factors to situations that may require actions to help the client.

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Due diligence is an initial and ongoing process of reviewing a client’s financial, legal, and other critical business information to ensure a healthy factoring relationship.  As a factoring broker, your deal referrals will flow smoothly when you understand the deal submission steps and due diligence process.  Capstone has experienced personnel who will work with you and the prospective client to be sure the qualification, due diligence, and onboarding processes are handled professionally and efficiently every step of the way.  Please review our broker resources and give us a call at (212) 755-3636 to learn how we can help you close more deals.

The Impact of Fintech on Financial Brokers

17:03 12 December in Blog, Broker Resources

If you are a financial broker or ISO, fintech has undoubtedly shaped your brokerage’s business practices as more financial service providers incorporate new technologies to alter how they interact with clients as well as originate and fund transactions.

In this article, we’ll discuss what fintech is, where it is headed with new technology and applications, and the emerging challenges and opportunities on the horizon for financial brokers and ISOs.

What Is Fintech?

Financial technology (more commonly known as “Fintech”) is a catch-all term for technology used to automate, streamline, digitize or disrupt traditional financial services.

Fintech has been around for ages however it wasn’t until the 2000s that it really picked up momentum and, in the modern sense, came to refer to software, algorithms, and applications for devices connected to the internet, including computers, tablets, and smartphones. Fintech platforms facilitate day-to-day tasks such as routine banking transactions, money transfers, bill payments, and online trading of securities to name a few. Fintech also enables technically complex transactions, including online personal and business loans, mortgages, real estate purchases, and sales, peer-to-peer (P2P) lending, and cryptocurrency exchanges.

Electronic payments, money transfers, wealth management, loans, mortgages, real estate transactions, insurance, cryptocurrency, and many other financial transactions have been impacted by fintech. 

According to Ernst & Young’s latest Global Fintech Adoption Index, 64% of the world’s population was using fintech applications in 2019, up from 16% in 2016.  Fintech has leveraged software and hardware technology tools to reduce the time required to complete financial transactions and slashed cost, making them more accessible for vast numbers of individuals and businesses around the world.

The Future of Fintech

Fintech will continue to be driven by new and improved technology that will further accelerate the speed of financial transactions, increase efficiency, reduce processing costs, and improve client and customer experience.

Some developments on the horizon include:

  • Further digitization of financial transactions, particularly in the banking sector.
  • Use of blockchain technology in financial transactions.
  • Smart contracts which digitize contract signing, language, and execution of contract terms.
  • Additional use of artificial intelligence (AI) predictive capabilities in decision-making processes and automated suggestions to speed transactions and improve client and customer experience.
  • Peer-to-peer matching of users of financial products and services with financial sources.
  • Further use of cryptocurrencies in financial transactions.

These advances will pose challenges that financial brokers and ISOs must adapt to prosper in a rapidly evolving financial landscape.

Challenges for Financial Brokers and ISOs

Financial brokers and ISOs will face increased challenges from disintermediation, technology, and regulation as a result of fintech development. 

Disintermediation

Advances in fintech will continue to make it easier and less costly for financial service providers to go direct to clients and customers instead of through an intermediary.  This will gradually eat away at a broker’s client base and will leave some brokers scrambling to position themselves as the go-to intermediary.  Intermediaries may find they have to adjust their business practices by leveraging technology and catering to their clients’ changing needs and preferences to remain relevant. From chatbots and mobile apps for loans, to peer-to-peer crowdsourcing, many financial service companies are looking to connect directly with customers in new ways. These changing points of client contact are redefining the industry and increasing competition.

Technology

With significant technological changes within the financial services industry, there is no doubt a shift towards the use of digital platforms.  The rise of fintech technology is set to see brokers transforming themselves to match changing client expectations as clients expect faster service and faster products. Brokers will continue to play a role in financial transactions, however fintech may eventually eliminate their need as financial service providers incorporate these new technologies for originating and funding transactions.  The speed and efficiency of client applications have been accelerated by integrated software and AI tools that facilitate the underwriting process.  

Regulation

With the regulation of fintech increasing, brokers face the risk of being excluded from transactions or the additional costs and roadblocks will make them uncompetitive.

Despite these challenges, there are also opportunities for financial brokers and ISOs to continue to play an important role for financial service providers.

Opportunities within the New Competitive Landscape

In order to retain their role, financial brokers and ISOs will need to adapt to the new competitive landscape where change is the norm and they will need to coexist with financial sources to fill the niches where brokers can add value to transactions on a competitive basis. 

No matter the level of innovation and digital transformation brought about by fintech, there will always be the need for a human element.  Financial brokers can provide the human element that will be needed in some transactions to facilitate complex transactions involving subjective judgments and human interaction. 

The human element is key as brokers offer their clients piece of mind. Some clients fear new technology and are late adapters of fintech applications.  Financial brokers will be able to fill a niche by facilitating transactions that financial sources will not be equipped to handle.

Let us not forget fintech advances have enabled brokers to better serve clients, coordinate smoothly with financial service providers, increase business volume, improve efficiency, reduce costs, and efficiently operate their businesses.  With the increased efficiency brought about by fintech, financial brokers will also free up time to do what they do best – that is supporting their clients.  The ability for their brokerage to be more consultative and personal will be the driving factor in their success.  Financial brokers are and will remain an essential part of the fintech ecosystem.  

Partnering with Capstone

Advancements with fintech will continue to alter the competitive landscape for financial transactions. Financial brokers and ISOs will need to be flexible and willing to adapt, filling niches where they can add value to a transaction.

If you are a factoring broker or ISO and need a partner you can trust to help you remain competitive and build your business volume, now is a great opportunity to partner with Capstone! The support we offer factoring brokers speaks to our commitment to your success and we take care of those who refer business. 

What makes us different from so many other companies who offer commercial financing is we review each client’s assets, consider their resources, and when necessary combine them with our advanced logistics platform. Using all the tools at our disposal, our final goal is a positive client outcome. For you, this means more satisfied clients, and another avenue for successfully closing deals. As you close more deals, success follows.

Capstone is a leading commercial finance company that provides a range of financial products designed to meet the cash flow and working capital needs of nearly any type of business, including trade financing, invoice factoring, and PO financing.  Get in touch today at (212) 755-3636.

 

How Financial Brokers And ISOs Can Help Their Clients Recover From Natural Disasters

11:59 04 November in Blog, Broker Resources

In the aftermath of major earthquakes, hurricanes, and wildfires, the recovery process generally requires a well-coordinated response and partnership between insurers, governmental agencies, aid organizations, financial institutions, service providers, and businesses to help the people and businesses affected rebuild their homes, businesses, and lives.  The following is how financial brokers and ISOs can help in the recovery from natural disasters.

Economic Losses from Natural Disasters on the Rise

Global economic losses from natural disasters reached $270 billion in 2021 and, unfortunately, are only expected to increase.  Most recently, we witnessed the destructive power of Hurricane Ian, a catastrophic Category 4 storm that made landfall on September 28, 2022, with initial damage estimated between $41 billion and $70 billion. As of October 2022, 471,581 insurance claims have been filed, with 431,702 reported in Florida. Nearly two-thirds of the Florida claims are homeowner and business claims (272,465), and the remaining are personal automobile claims (151,892). Hurricane Ian was the 5th strongest hurricane to hit the continental United States with the winds and flooding from the storm impacting areas including Florida, Georgia, Alabama, the Carolinas, and Puerto Rico.

Financial assistance for affected individuals and businesses is available from a number of sources. If you have clients that a natural disaster has impacted, you can help them understand what financial assistance and relief are available.

Financial Assistance and Relief Available to People and Businesses

Financial assistance and relief for losses not covered by property insurance is generally available through a number of sources, including:

  • Federal Emergency Management Agency (FEMA) – Funding from the federal government in designated disaster areas to help businesses and individuals with temporary housing; debris removal; infrastructure restoration – roads, bridges, communications, electricity, and other utilities; remediation, construction, and other expenses.
  • Small Business Administration (SBA) – Long-term, low-interest loans to repair or replace damaged property. Home Disaster Loans are available to homeowners and renters to repair or replace disaster-damaged real estate and personal property, including automobiles. Businesses of any size may obtain Business Physical Disaster Loans to repair or replace disaster-damaged property owned by the business, including real estate, inventories, supplies, machinery, and equipment. The SBA also offers Economic Injury Disaster Loans (EIDLs) of up to $2 million to meet expenses the business would have paid if the disaster had not occurred. FEMA also provides recovery grants to small businesses, but only through referral upon completion of the SBA loan application.
  • State and local relief programs – Programs for small businesses are limited, and state governments often appropriate emergency funds only after a disaster declaration is made, which delays immediate assistance.
  • Private debt, loans, or lines of credit from banks and other lenders – Securing a loan or line of credit requires collateral, but a disaster can limit the ability of business owners to pledge their homes that may be damaged from the disaster.
  • Alternative funding sources – Provide funding solutions, including invoice factoring and purchase order (PO) financing, to quickly increase cash flow and working capital. They are less difficult to apply for than a bank loan. 

The ability to obtain funding for cash flow and working capital, and to obtain it quickly, is critical to your client’s ability to supply and provide services to customers in disaster-ravaged areas.  That said, if your client has been directly impacted by the natural disaster, they may find themselves in need of critical cash flow to aid in their recovery efforts.

How To Help Your Clients

The best way to help your clients is by partnering with a funding source that has experience in funding emergency preparedness and natural disaster relief projects.  Since Capstone’s founding, we have specialized in finding working capital solutions for small to mid-sized businesses and have funded many critical disaster relief projects and transactions.  We look for client-specific solutions to enable us to help as many businesses as possible meet their business funding needs no matter level of urgency.

Earlier this year, a disaster relief transaction came to us through a client that had been awarded an emergency purchase order to supply the State of Louisiana with 250 trailers related to continued Hurricane Irma recovery efforts. Capstone provided funding via invoice factoring and purchase order (PO) financing facilities. The transaction would not have been possible without Capstone’s ability and know-how to structure the transaction and efficiently (and quickly) deploy business funding, as the trailers had to be delivered within five days of receipt of the PO. 

Fast forward to recovery efforts stemming from Hurricane Ian, Florida officials are aware of how our client could perform and deliver on time and may use them to supply trailers for emergency housing in Florida. Organizations and businesses in hurricane-ravaged areas are also reaching out to Capstone for assistance in funding disaster recovery initiatives, as they are aware of our past performance and experience with such initiatives.  

What makes Capstone different from so many other companies who offer business funding is we have the experience and knowledge in structuring transactions. Capstone understands the complexities involved and has the relationships, necessary capital, and ability to rapidly deploy capital to clients that provide products and services to organizations and businesses serving those affected by natural disasters. 

Typically, the situation’s urgency requires funding sources that can quickly act quickly and structure a transaction.  Traditional (institutional) financing and funding methods may not be an option because of their lengthy application and approval process. 

Clients that work with flexible and fast funding sources with disaster recovery project experience can be more responsive and successfully perform. As a consequence, they have the ability to take on larger projects and provide a better quality of service.  These clients are awarded more and larger projects and become preferred vendors/service providers during natural disasters.  

Capstone provides a range of financial products designed to meet the needs of nearly any type of business, including trade financing, invoice factoring, and PO financing.  If you have clients in any area devastated by natural disasters that need quick access to working capital and cash flow, contact Capstone today.

Commercial Funding Through PO Financing and Invoice Factoring

16:30 10 October in Blog, Broker Resources

Small and medium-sized businesses will often face cash flow and working capital problems at one point or another.  For financial brokers or ISOs looking to help clients manage these issues, there is no one size fits all approach.  The right type of business funding will depend on several factors, such as why the funding is needed, how quickly it is needed, and the business’s qualifications.  

While business funding can come from various sources, traditional borrowing may not always be the best option to pursue.   Banks and other institutional lenders tighten loan requirements and reduce credit exposure to these businesses when their help is needed most.  Two alternative business funding options to consider for your clients are purchase order (PO) financing and accounts receivable factoring (aka “invoice factoring.”)

What PO Financing and Invoice Factoring Are Used For

PO financing and accounts receivable factoring are two financial strategies that your clients can use to purchase inventory or materials and accelerate the conversion of accounts receivable into cash.  PO financing and invoice factoring are both used to address cash flow issues and provide working capital, but they are utilized at different stages in a transaction cycle.

PO financing is used to purchase inventory or other resources related to specific purchase orders or contracts. It provides funding to a business’s vendors or suppliers so they may fulfill an order or get started/complete a project.

Frequently, small and medium-sized businesses are unable to obtain credit from suppliers or a loan from a bank to purchase inventory or materials due to varying circumstances. It is important to note that in certain instances where the supplier is located outside the U.S., a letter of credit is usually required. PO financing provides businesses with the ability to fulfill orders as well as perform work BEFORE they’ve invoiced and received payment for the invoices. In effect, it’s an advance against the funds a business expects to receive once their customer’s invoice is paid and is intended to cover the cost of goods sold. 

Invoice factoring, on the other hand, is a financial tool that businesses use to accelerate cash flow by selling their unpaid invoices for a completed order or project to a factoring company at a discount. Businesses receive cash immediately for unpaid invoices instead of waiting for their customers to pay. This funding can then be used for things such as payroll, operating expenses, growing the business, or the next contract or project.

Invoice factoring can be used by itself to accelerate cash flow without also using PO financing. However, when PO financing is used, invoice factoring is also typically used to complete the financing transaction.

While PO financing and invoice factoring are both designed to provide solutions to a business’s working capital and cash flow needs, the key points to consider are the timing of when the funds are needed in the transaction cycle and the use of funds.  

Advantages of PO Financing

PO financing allows business owners to increase the working capital necessary to boost sales, increase product or service offerings, and allows the business to gain the edge over the completion.

PO financing is more accessible than a bank loan and may be easier to qualify for. The credit underwriting decision is based on the financial strength of the client’s customer, unlike a bank that uses the business’s credit profile regardless of the income and cash flow that will result from fulfilling a firm purchase order or contract.

Banks favor large customers and tend to reduce credit exposure to small and medium-sized businesses when they need it the most.

PO financing may sometimes cover up to 100% of the supplies, inventory, or resources needed to get started/complete a project or order without using credit available under existing lines of credit.  It also enables clients to pursue business opportunities, which they might not otherwise be able to do because of insufficient working capital, and it can be a stepping stone to developing a relationship with a supplier that leads to open-account terms.

Advantages of Invoice Factoring

Invoice factoring helps to accelerate cash flow by converting accounts receivable to immediate cash. Clients will not have to wait 60+ days for their customers to pay an invoice. Having access to those funds increases cash flow and reduces the need to draw on availability under existing lines of credit.

An invoice factoring facility is also easier to obtain than a bank loan, and the credit decision is based on the financial strength of the client’s customer, not the client. Invoice factoring facilities are more flexible to use than bank loans and can be provided for a single invoice or as a program for all of a client’s accounts receivable.  In addition, they can be custom tailored to fit a client’s business model.

Partner with Capstone for Fast Business Funding

Capstone is a leading commercial funding company that is focused on providing working capital to cash-starved businesses.  Capstone can tailor a program using existing accounts receivable to generate working capital and cash flow that fits your clients’ business needs.  

We offer every client: 

  • Fast funding and approval time
  • Higher approval rates – unlike traditional lending institutions that scrutinize credit history and years in operations, Capstone is focused on the creditworthiness of the client’s customers
  • Solutions for small to medium-sized businesses
  • Competitive rates
  • No maximum transaction sizes
  • No long-term contracts
  • Local and personalized service – all over the U.S., no matter where your client is located

If you would like to discuss PO financing and invoice factoring for your client’s business, please contact us at your earliest convenience.

How to Become a Factoring Broker or ISO

02:52 12 September in Blog, Broker Resources

The global factoring market is a trillion-dollar industry critical in providing businesses with alternative financial solutions.  With entrepreneurship becoming increasingly popular and people wanting to be their own boss, many professionals find the opportunity for a career and success by becoming a broker within this industry.

Whether you are a budding entrepreneur, looking for a source of residual income, or simply want the freedom of working from home, becoming a factoring broker may be a career path that complements your talents and gives you the lifestyle you prefer.

What’s a Factoring Broker or Independent Sales Organization (ISO)?

A factoring broker is an industry professional such as a commercial financial consultant or independent sales office (ISO) that acts as an intermediary “referrer” between small or medium-sized businesses needing accelerated cash flow/ working and a factoring company. Factoring companies (factors) provide alternative financial solutions to accelerate cash flow and increase working capital. 

A factoring company is not a bank or traditional institutional lender, and they do not make loans. Factors provide alternative funding solutions to a broad range of industries that are more flexible and easier to obtain than a bank loan. 

Factoring brokers are not loan brokers. Loan brokers act as an intermediary between a borrower and a bank or lender.

Alternative Financial Products and Services

The products and services factors can provide include: invoice factoring, purchase order (PO) financing, trade financing, and business services.

Invoice factoring is a form of debtor financing that businesses use to accelerate cash flow or increase working capital by selling their invoices (account receivable) to a third party known as a factoring company at discount.  Businesses receive cash immediately for their unpaid invoices instead of waiting for their customers to pay.  Factoring is easier to obtain and more flexible than a loan. Credit approval is based upon the financial strength of the client’s customer, not the credit profile of the client.

PO financing can be used along with invoice factoring and funds the purchase of pre-sold inventory, finished goods in most cases, materials, or other resources related to specific purchase orders or contracts.  When the client bills their customer, the invoice is factored to pay off the PO financing facility.

Trade financing provides funding for international imports and exports and domestic transactions.

Factors can also provide credit and collections services and other business solutions to help clients attain their objectives.

These financial products assist clients in many ways, including their needs for working capital solutions, business growth, seasonal gaps in cash flow, turnaround funding, etc.  Factoring, like many areas of finance, has its own jargon or lingo. When considering becoming a factoring broker as a career, it is helpful for the financial professional to know and understand.

Reasons to Become a Factoring Broker or ISO

There are several reasons to become a factoring broker or ISO, including:

  • Growth potential: The global factoring market is a trillion-dollar industry and is projected to grow at a CAGR of 6.1% from 2022-2027. Much of this growth will come from small and medium-sized businesses, the heaviest users of alternative funding solutions.
  • Focus on business development: ISOs refer potential clients to factors. Factors do the heavy lifting required to evaluate and approve new clients. They also work with clients to onboard them to have a smooth transition. This leaves ISOs more time to develop prospective clients and grow their business volume.
  • Unlimited income potential: factoring brokers earn commissions over the length of time the client has an active relationship with the factoring company. Commissions can grow without limit with increased volume from existing clients and the development of new clients.
  • For accountants, insurance agents, lawyers, and other professionals, commissions can add another income stream to their businesses.
  • Work from home or an office and benefit from a better work/life balance.
  • The investment and time required to get an ISO up and running is low.
  • There are no specific education requirements or formal licensing in most states. Some understanding of financing and business transactions is helpful.
  • The process to sign-up and do business with a factor is simple and requires little time.

Steps to Become a Factoring Broker

If you would like to become a factoring broker with Capstone, the first step is to contact us via phone at 347-821-3400, through a web form on the website or by sending an email to [email protected]  

The next step of the onboarding process is to sign an Originator Agreement which identifies the terms of the relationship. We will then provide you with application documents, tutorials, training materials, brochures, and other educational aides to facilitate the onboarding process. After completing these steps and digesting the onboarding materials, you should be ready to refer your first prospective client. 

Why Choose Capstone

The factoring company you choose to work with is crucial to becoming a successful factoring broker and making commissions. Capstone is easy to partner with and provides the support you will need to be successful. Some of the benefits you can expect from working with Capstone include:

  • Industry knowledge and experience. Capstone has been a leader in the factoring industry for over 30 years and has experienced staff to assist you with onboarding to make your transition to a factoring broker as smooth as possible.  This is also important when structuring transactions, developing innovative business ideas, and helping your clients avoid pitfalls.
  • Custom-tailored funding packages. We understand every customer has their own unique needs, and we will work with you and with your client to make sure we offer a package that meets those needs.
  • Easy agreements, forms, and transactions to work with so you can spend more time developing new business.
  • Training so you need never worry about any uncertainty with our financial products. We can provide you with training, exclusive educational materials, and brochures.
  • Marketing materials to support your business development efforts.
  • Fast funding and approval times for new clients, so you earn commissions sooner.
  • Local and personalized customer service regardless of where your client is located.
  • Competitive commission rates. If we are doing business with your customer, you will receive a regular commission check from us.
  • Financial resources to fund the necessary transaction size and support your customer’s growth plan.  Small or new factoring companies may lack the resources to fund transactions. 
  • A wide range of financial tools and programs to help facilitate the growth of your client.  We offer invoice factoring, purchase order (PO) financing, domestic and international trade finance, and pre-exporting financing programs. A single source for business funding can be more efficient and facilitate seamless business transactions. 

If you are looking to become a factoring broker or ISO and need a partner you can trust to help you build your business volume by assisting your clients, now is a great opportunity to partner with Capstone. The support we offer factoring brokers speaks to our commitment to your success. Get in touch today at (212) 755-3636.

2022 State of the Factoring Industry Report

17:26 22 August in Blog, Broker Resources

The factoring industry has undergone radical changes, and a growing number of concerns exist which overshadow the outlook for the factoring market in the second half of 2022 and 2023.   Despite these concerns, there are opportunities that factoring brokers and independent sales offices (ISOs) can capitalize on to grow their business pipeline and meet their client’s working capital needs.   

In the two short years since Capstone’s 2020 Global Factoring Report, the U.S. and the world have experienced upheaval from the COVID-19 pandemic, an economic recession with unemployment not seen since the Great Depression, massive fiscal stimulus packages including direct payments to individuals and loan guarantees for businesses, the worst inflation in four decades, a rapid increase in short-term interest rates, the war in Ukraine, and the onset of another economic recession.

Not surprisingly, factoring and trade finance volume fell 6.5% globally and 23.0% in North America in 2020 and rebounded strongly in 2021 with increases of 12.6% globally and 45.7% in North America. The global factoring market is expected to grow further at a CAGR of 6.08% during 2022-2027, from $3,109 billion in 2021 to $4,430 billion in 2027.

Concerns Overshadowing Alternative Funding Sources

The U.S. economy is slowing and may be in a recession after two consecutive quarters of negative GDP growth. Inflation may moderate but will likely remain at persistently elevated levels for some time. Persistently elevated inflation rates will give the Federal Reserve reason to continue raising short-term interest rates until the Fed’s inflation target is reached.

The war in Ukraine and growing friction with China may develop into wider conflicts that could disrupt economic growth further.

Overreaching state and federal regulations and disclosure requirements pushed upon alternative funding sources may create a credit crisis with businesses having fewer financing options as more alternative funding sources consolidate or go out of business. As of 2020, more than 90% of all domestic invoice factoring was done by small and medium-sized businesses. These business owners often struggle with cash flow, and as a consequence, they have the greatest difficulty in obtaining traditional financing.

The difficulties many businesses have encountered obtaining traditional financing have increased the number of prospective clients with SBAs, senior liens, and MCAs, making it more difficult to approve new clients if Subordination Agreements or Inter-creditor Agreements cannot be obtained.  

Despite these concerns, there are opportunities factoring brokers and ISOs can capitalize on to benefit both themselves and the prospective client.

Trends that Factoring Brokers and ISOs Can Capitalize on:

Stretched payments – During an economic slowdown, businesses “stretch” their accounts payments on their accounts receivable. This creates a cash flow problem for many businesses and an opportunity for factoring brokers and ISOs to work with alternative funding sources, such as Capstone. The key to surviving an economic slowdown is cash flow management.  Businesses caught in a cash flow “squeeze” are more receptive to using invoice factoring as a cash flow management strategy to accelerate their cash flow.  When the economy is in a decline, businesses have used invoice factoring to help them survive.

Tighter lending standards – Small and medium-sized businesses may find it harder to obtain loans from traditional financial institutions as banks tighten their lending standards, raise their risk thresholds, and focus on their larger, well-heeled customers. This increases the number of potential clients that will need alternative financial products.  Capstone offers custom-tailored alternative funding solutions, including invoice factoring, purchase order (PO) financing, domestic and international trade finance, and pre-exporting financing programs, which can be integrated into any business model.  

Underserved businesses and industries – In Capstone’s experience, businesses in the following industries, as well as MWDBEs, are underserved by traditional funding sources, including:

  • Construction – General Contractors and Subcontractors
  • Manufacturing
  • Coal Mining
  • Oil and Natural Gas
  • Suppliers/ Distributors
  • Renewal Energy and Environmental

These types of businesses and industries have a significant number of potential clients for including invoice factoring and PO financing.  Capstone understands the unique challenges faced by these businesses and has the experience necessary to structure a successful funding strategy to support their working capital needs.

Prior SBA loans, senior liens, and MCAs – Many prospective clients may have prior SBA loans, senior liens, and merchant cash advances (MCAs).  It is important when working with these clients to also work with the right alternative funding source.  Negotiating a Subordination Agreement or Inter-creditor Agreement with senior lenders requires experience and skill.  Fortunately, Capstone has a track record of successfully negotiating the proper agreements for their clients.  As the economy weakens, there will be more businesses in this situation that may benefit from invoice factoring.

Decline of government-backed loans and relief programs – When looking back to 2021, the biggest competitor for the factoring industry was the U.S. government with economic injury disaster loans (EIDL), Paycheck Protection Program loan forgiveness, and other government stimulus programs. When the businesses that took advantage of these programs burn through the liquidity they received, traditional lenders will start weeding out the companies that don’t meet their more rigorous credit criteria. This will be an additional opportunity to develop these businesses as prospective clients for a funding solution through Capstone. 

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The United States continues to be one of the largest markets in the world for invoice factoring.  While the outlook for the remainder of 2022 and 2023 is uncertain, there are several variables in play that can both positively and negatively impact the economy and the volume of invoice factoring over the near term – recession, inflation, rising interest rates, government regulations and disclosure requirements required of alternative funding sources, and geopolitical events.

At the same time, these macro-level factors will create a business environment where small and medium-sized businesses will need invoice factoring and PO financing more than ever to provide the working capital financing to survive a recession and the impacts of inflation and higher short-term interest rates.  Capitalizing on the above trends will help you increase your business pipeline and meet your client’s working capital needs.

Business Funding Available to Companies with Current SBA Loans

10:43 12 July in Blog, Broker Resources

Factor brokers and independent sales organizations (ISOs), did you know your clients with outstanding Small Business Administration (SBA) loans can still qualify for funding with a factoring company? Don’t let a SBA loan prevent you from pursuing invoice factoring and PO financing opportunities with clients that need to increase their working capital funding.

In this article we’ll discuss SBA loans, and how factoring companies (factors) work with SBA lenders that have first (senior) lien positions on assets, to qualify your clients for working capital funding. 

What Is an SBA Loan?

With the arrival of stimulus programs including CARES Act and the Paycheck Protection Program (PPP), government-backed loans have become extremely popular for businesses over the past couple years.  These loans are commonly known as “SBA loans” and are business loans guaranteed in part by the Small Business Administration, an agency of the Federal Government. SBA loans are designed to help small businesses obtain the financing they need to weather adverse business events, such as the pandemic, as well as for growth as their business expands. Since the onset of the pandemic, the volume of SBA 7 (a) loans, the most commonly used SBA loan, has risen dramatically from $22.5 billion issued in the fiscal year ended July 31, 2021, to $36.5 billion in the fiscal year 2022.

Features of SBA Loans

The SBA does not make loans directly. Instead, it works with lenders that process loan applications and issue loans. The SBA guarantees 50-85% of the loan amount.

The SBA sets the maximum interest that may be charged on an SBA loan. The rate charged by lenders is lower than it would otherwise be for a similar loan because of the SBA guarantee. SBA loans are easier to obtain than regular business loans due to the government guarantee.

SBA loans offer longer repayment terms than regular business loans, which makes it easier for small businesses to manage the cash flow needed to make loan payments.

SBA lenders must take a first lien position on the assets financed with loan proceeds, and typically a lien on all other assets of the company including but not limited to inventory, accounts receivable, equipment, general intangibles, real estate, etc.

Types of SBA Loans

There are a number of SBA loan options to fit a wide range of business needs ranging from export and disaster loans to loans for working capital, furniture, equipment, real estate, and business expansion.

The most commonly used loan is the SBA 7 (a) Loan. The proceeds can be used for just about any business need – working capital, furniture, equipment, and business expansion. The maximum loan amount is $5.0 million with repayment terms up to 25 years depending on the use of the proceeds. Standard 7 (a) loans can take a number of weeks to process.

For faster processing, there are SBA Express Loans with a maximum loan amount of $500,000 and 7 (a) Small Loans with limits up to $350,000.

How Factoring Companies Work with Lenders that Have First Lien Positions

SBA loans can be a good source of capital, but like any loans they don’t always provide all the working capital a company needs to grow. Invoice factoring and purchase order (PO) financing can provide the working capital financing clients need for growth. Experienced factors can help clients with SBA loans by working with their lenders to obtain the first lien positions needed to approve working capital financing programs.

How a Subordination Agreement Is Used to Obtain the Lien Position a Factor Needs

When a client has an SBA loan, the lender will usually have a first lien position on accounts receivable, inventory, and all other assets. This can be problematic because a factoring company needs to have a first lien position on general intangibles, accounts receivable and inventory to approve a prospective client. In order to resolve this situation, a factor must negotiate a subordination agreement with the SBA lender. 

A Subordination Agreement is handled with an Intercreditor Agreement between the SBA lender and a factoring company. The SBA lender agrees that the factor can have a first lien position in certain assets. The SBA lender subordinates its lien position to the factor and takes a secondary lien position. Subordination gives the factoring company the security it needs to fund a client’s accounts receivable and possibly finance its purchase orders. 

The challenge for the client is to convince the SBA lender to give up its first lien position. The factoring company, who is working with the prospective client, needs to convince the lender that subordinating its first lien position to the factor can provide the necessary working capital which will benefit the client, and make the SBA lender’s position on the other assets more secure.

In some cases, a factor may need to agree to limit the subordination of an accounts receivable lien to a maximum dollar amount or to certain accounts. This makes the SBA lender’s security interest subordinate to the factor’s security interest, but only up to the amount of the cap or in specific named accounts receivable.

SBA lenders may also not be willing to give up their first lien position in the client’s inventory. In some cases, the factor may need to negotiate a lien position that is limited to returned inventory related to factored accounts receivable only.

A Factor Company’s Experience in Negotiating with SBA Lenders Matters

Negotiating with SBA lenders requires experience and skill. It is important to work with a factor that has a track record of successfully negotiating with SBA lenders to obtain the proper Subordination Agreements needed for their clients.

When you have a client with a current SBA loan that needs additional working capital to grow their company, work with a factor that has the skills and experience needed to successfully negotiate a Subordination Agreement, so your client can obtain access to much-needed working capital.

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Capstone Capital Group, LLC specializes in providing working capital programs that can be custom-tailored to support a client’s business model. Capstone has a proven track record of working successfully with SBA lenders to obtain the Subordination Agreements needed to fund invoice factoring and PO financing programs for clients. 

Tools to Increase Productivity and Profits for Factor Consultants and ISOs

18:15 14 June in Blog, Broker Resources

Do you feel like you’re working as hard as ever but not accomplishing what needs to be done to be successful as a factor consultant or independent sales organization (“ISO”)? 

Take a minute to do a quick assessment of how your business is doing.

  • Is your client list growing?
  • Is your volume increasing?
  • Are you contacting enough potential clients to keep your pipeline full?
  • Is your percentage of conversion of prospects into clients improving?

If the results of your assessment are not in the affirmative, then you need to take steps to increase productivity, business volume, and profits.

There are three actions you can take to improve your results.

  • Avoid distractions
  • Focus on value-added activities
  • Use technology tools to eliminate manual activities and improve productivity

Avoid Distractions

Email, text messaging, smartphones, and social media can be powerful tools for communication, but they can also become a source of distraction and reduce your productivity. It’s very easy to let yourself become a slave to answering emails and text messages, and fall into the habit of reading and responding to social media postings and surfing the internet. 

A simple internet search will provide a plethora of tips on how to use these communication tools without becoming addicted to habits that can sap your productivity. These tools should work for you, not vice versa.

Focus on Value-Added Activities

Value-added activities such as prospecting for clients, making presentations to prospects, onboarding new clients, and building volume with existing clients help to increase your business volume and profits. When you are distracted or your day is filled with busy work, you will not have enough time to devote to value-added activities. Planning is the best tool to use to focus on activities that will grow your business volume and increase profits.

An annual plan can help guide you to the areas you need to focus on to achieve your objectives. A weekly/monthly plan laying out what you need to do to keep on track can help to synthesize your annual plan objectives into the value-added activities you need to focus on in the near term. And of course, a daily To-Do list is always a helpful tool to use to maximize your focus on the value-added activities you need to work on.

When you develop plans, short-term or long-term, be realistic. Don’t try to do everything. Planning too many activities will reduce your productivity and you won’t do the activities as well as you should. Focus on value-added activities and work toward your plan goals.

Use Technology Tools to Eliminate Manual Activities and Improve Productivity

Time is a limited resource. You need to conserve time for value-added activities. Manual activities waste the limited time you have available. Technology tools can help you to minimize the amount of time you spend on manual activities.

Here are some technology tools that can help you be more productive.

Automate Business Processes

If you still have manual business processes, it is essential to automate them ASAP for two reasons. 

  • Your clients and business partners, e.g. factors, probably have fully automated business processes. It will be difficult for you to continue to do business with them if you don’t automate. And, they may not want to continue to do business with you if you don’t automate.
  • Manual business processes can consume a huge amount of your time that could otherwise be spent on value-added activities. List your manual business processes and estimate the amount of time you spend on them weekly/monthly. You’ll probably be very surprised at how much time you could save by automating your business processes.

Time Management

When you own a small business of any kind, including a consulting firm or ISO, the boundaries between your personal time and business time can be opaque, which makes time management critical to your success.

  • If you aren’t using a calendar software application such as Google Calendar or Apple Calendar which are free, or Microsoft Calendar for Microsoft users, you will probably do a better job managing your time by planning your week/month and benefit from the automated reminders they provide.
  • Use online retailers, consumer apps such as grocery shopping and delivery, and restaurant meal delivery to free up time to spend on your business. 

Marketing and Communications

The value-added activities you want to focus on revolve around identifying, attracting, contacting, and communicating with prospects and clients. Following are some tools that can help you be more productive in these areas.

  • Customer Relationship Management (CRM) software can increase your productivity by streamlining customer interaction. CRM organizes client profiles, history, and conversations in one location. It gives you a concise overview of your client interactions with dashboards that provide the information you need at a glance and also allows you to schedule and automate communication.  It is not uncommon for consultants to have several thousand client prospects and networking contacts so therefore you cannot effectively build relationships without this tool.
  • Email Management Software (EMS) applications can help you to manage large volumes of inbound emails. EMS helps you to track and respond to priority messages and quickly archive and retrieve emails.
  • Social Media Management (SMM) tools can help you engage with prospects and clients. SMM enables automated and real-time posting to multiple channels. It gives you the ability to monitor social media and learn about client preferences. SMM allows you to post to multiple platforms at once and can be used to consolidate a number of networks with just a few clicks.
  • File sharing tools can help with document management and the deal submission process.  It enables you to securely distribute, collect, and organize documents more conveniently with clients and other third parties.  This tool can be particularly useful in efficiently working with large clients or with complex transactions.  It also will expedite the underwriting process once the deal is submitted to the factor company. 

Technology tools, focusing on value-added activities, and avoiding distractions can improve your productivity and profits.  This will help you work efficiently and effectively with clients and will greatly improve the probability of approval by the factor company during the underwriting process.  Your business volume will grow and so will your profits.

Capstone works with factor consultants and ISOs to help them be successful. Capstone has the resources and experience to help you increase your business volume and profits. For additional information on resources to assist you, please read: consultant Resources – Capstone Capital Group (capstonetrade.com)

Funding Strategies For Businesses To Weather a Recession

16:15 05 May in Blog, Broker Resources, Business Funding

A growing number of business leaders and economists have warned that the U.S. is headed for an economic slowdown or possibly even worse, a recession.  Are your clients prepared?

Surging inflation is driven by a tsunami of fiscal stimulus from Federal and state governments, and supply-chain constraints resulting from pandemic restrictions have made it necessary for the Federal Reserve to begin tightening the money supply and increasing interest rates.

The Russian invasion of Ukraine made matters worse by precipitating a leap in prices for energy, agricultural commodities, and metals. The Fed will probably need to tighten faster and harder than initially anticipated. Economic pundits have begun to reduce forecasts for economic growth and start discussing the possibility of the “R” word. 

The time to prepare is now.  Financial brokers can use the following strategies to help small and mid-sized companies plan ahead to weather a recession.

Accelerate Cash Flow

The key to surviving a recession is cash flow management.  In a recession, cash flow is often reduced due to a number of things including customers stretching their accounts payable to conserve cash. As a result, business owners may experience a deceleration in their own cash flow and may have to use available credit facilities.  Having high accounts receivable balances outstanding for an inordinate amount of time can be detrimental to the sustainability of a business.  A double hit to cash flow and available credit can seriously impair a business owner’s ability to meet its financial obligations. Accelerating cash flow with invoice factoring through a factor company, such as Capstone, can help to reduce this dual impact.

Invoice factoring accelerates cash flow by speeding up the transaction cycle. Instead of waiting 60+ days for customers to pay, business owners can convert their outstanding invoices to immediate cash. They will have more cash available to fund operations and reduce the need to draw down available credit facilities.

Avoid Slashing Key Programs and Personnel

When an economic slowdown occurs, it is common practice for businesses to cut operating costs in order to conserve cash.  A mistake many businesses make, however, is cutting key sales, marketing, and product programs.  These programs are the link to customers as well as the marketplace, and the source of future growth.  Cutting key programs may cost business owners much more in the long run than they will save in the short run.

The pandemic spawned a change in the labor market making hiring and retaining personnel a major challenge for many businesses. Cutting headcount to reduce operating costs and conserve cash should be carefully evaluated to avoid recruiting costs and problems hiring people that may delay ramping up when the economy recovers. 

By resisting the urge to implement drastic cuts in these areas, business owners will be able to position themselves to capitalize on the recession and potentially scoop up market share that competition left behind through their cost-cutting.  

Increase Working Capital Facilities

Adequate working capital and the right type of facilities are also critical to weathering a recession. 

If a business owner needs additional working capital, they should apply now. The Federal Reserve’s monetary tightening and interest rate increases, combined with the possibility of a recession will make it more difficult if the business owner delays. In a tight monetary environment, banks and other traditional financial institutions tighten their credit requirements and favor larger customers while reducing their credit exposure to small and mid-sized companies. 

Work with a Factoring Company

During a recessionary period, smaller community banks and other traditional financial institutions may not be able to provide adequate working capital because of lending limits. Also, many businesses may find they will fall outside the acceptable risk threshold to access and retain lines of credit as well as more traditional business funding from these sources.  Let the prospective client know that you may be able to help in the event they are unable to qualify for increases to existing credit facilities or new facilities. 

While these financial sources prefer to lend to businesses with only positive financial performance, stable cash flows, and predictable revenues, factoring companies, such as Capstone, can often work beyond these issues and provide funding based on the quality and financial strength of a business owner’s accounts receivable.   Many businesses also often require faster approvals and access to funds than banks and other typical lenders can offer. Because of these obstacles to obtaining traditional loans, business owners should consider business financing alternatives, such as invoice factoring and P.O. financing.  

Invoice factoring and P.O. financing won’t tie up availability and can be used to supplement existing credit facilities. They are easier to obtain than bank loans, and the terms are more flexible. Alternative financing facilities can be custom-tailored to meet a client’s business requirements. More importantly, approval is based on the financial strength of the prospective client’s customers, instead of the business’s credit profile.

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Business owners can survive a recession and be in a position to take advantage of opportunities by implementing the above strategies now.  They will also avail themselves to more funding options when they are not operating in crisis mode and when the financial health of their business is at its strongest.   

Whether we’re simply seeing an economic slowdown or a full-fledged recession, Capstone is here to help your clients stay focused on what they do best – running their company.  We have the experience and resources to custom-tailor invoice factoring and P.O. financing programs for your clients.

 

Recognizing Potential Transaction Red Flags in Factoring

12:24 04 April in Blog, Broker Resources

The key to being a successful factoring broker is to identify and develop leads that have a high likelihood of being approved by the factor company you work with. The flip-side of this is that successful factoring brokers avoid leads that are marginal and have potential issues which may result in their application being denied.

Questionable leads can be a huge time suck that diverts your time and effort from identifying and developing leads to increase your business volume.

Identifying problematic leads can be difficult however experience will help you recognize the signs that point to potential problems. These signs are red flags that the lead you are trying to develop may not result in an approved client.  Avoid problematic leads by recognizing these 10 transaction red flags.

Incomplete information

The prospective client refuses to provide information or documentation and is suspicious. Documentation contains many errors, misspellings, and inconsistencies with company names.  The prospective client is unable to send all their documentation and/ or due diligence in one or two email submissions.  Legitimate clients are cooperative and provide complete as well as error-free information and documentation on a timely basis. 

Account debtors with bad credit

Client customer (“account debtors”) with weak and unfavorable trade references, poor payment history, new banking relationships, and absence of credit facilities are red flags for potential problems. 

Evidence of collusion between the prospective client and its customers 

A sudden large increase in credit terms followed by the customer’s insolvency, or a surge in volume with a new customer that has limited trade and bank references and is unable to pay, are examples of possible collusion.

Transaction has been shopped around to different funding sources or promoted by other brokers Transactions that have been shopped around are a good indicator that there are potential problems. Factor companies most likely will not decline business opportunities unless there are red flags.

Prospective client is a start-up or has very limited operating history 

Companies that are start-ups or have limited operating history have a much higher risk of operating and financial problems.  There is always the chance that the business may be a front for financial fraud or to pass on risk.

Web and social media presence 

Most companies need web and social media presence to be successful. Little or no internet infrastructure is a red flag for potential financial fraud or an indication that the prospective client does not have sufficient business experience.

Spotty client background

Excessive litigation, unfavorable media coverage, and a poor reputation in its industry. Prospective clients that are contentious and difficult to deal with are a higher risk for operating and financial difficulties, and they may simply not be worth the hassle of doing business with.

Body language of the client

A prospective client’s body language can say a lot.  Being overly aggressive or even desperate, nervousness, evasiveness, inability to hold eye contact, confusing and contradictory statements, and unexplained urgency or requests for short cuts with changes to the transaction at the last minute are all red flags.

Transaction has unusual features or trends – size, nature or frequency of transaction 

Unusually large transactions, a few large single-invoice sales, increasing volume in a declining economy, a significant increase in sales to a new customer, and significantly more generous credit terms may be indications of potential problems.  Transactions that are unusual for prospective client’s profile or significantly different than past history and industry norms are all red flags.

If the transaction seems too good to be true, it probably is.  Unrealistic assumptions and projections not supported by past history or expected trends in the industry and economy, and documentation that shows no past due accounts, DSO equal to credit terms, or other unlikely KPI results are warning signs. A sharp increase in sales volume that is not consistent with past history, sales and marketing programs, and industry and economic outlook may indicate falsified sales.

Direct-to-consumer (DTC) sales or other sales issues

Sales must be business-to-business (B2B) for the accounts receivable to be eligible for factoring.  Many businesses today are trying to sell their products DTC, and some businesses may have both DTC and B2B sales so be on the lookout for any prospective client’s sales that may be to consumers.

Consignment and guaranteed sales which are sales that are subject to any contingency other than normal returns in the course of business for quality or delivery issues are also red flags.  Prospective clients with retail customers experiencing high levels of returns, chargebacks, sales allowances or large sales deductions may result in customer (account debtor) payments not satisfying the amount advanced to the client.  This may necessitate a reduction in the advance rate, or jeopardize the viability of the factoring program.  

Learning to recognize potential transaction red flags will save time for you and the factor you work with. Time that you can use to successfully identify and develop viable client leads to build your business volume. 

Capstone has the experience and resources to help you build your business volume. For more information on Capstone’s broker resources, please read:  Broker Resources – Capstone Capital Group (capstonetrade.com)

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