Case Studies, or examples, are one of the best ways for those in training to learn about any new concept and the many case studies featured in the 5-star rated Factoring 101 Training Guide (available through IACFB) provide new factoring brokers with some true life examples of how factoring has been used to solve particular problems of various small businesses. Below are three (3) case studies taken from the IACFB training guide. All are based on real client examples, although the names of clients and customers have obviously been changed. The following three case studies are very typical examples of what you will run into as a freelance factoring consultant.
Lester’s Security Plus
Lester Thornton started Lester’s Security Plus on a shoestring budget in 2015 initially financed with a $20,000 Home Equity Line of Credit (HELOC). Lester’s Security Plus primarily provides guards for local gated communities and has gained a good reputation among the real estate management companies in the area.
Last year, Lester received an offer to provide gate guards for four existing communities from a local management company. The management company, Manage Co, was replacing their previous service and wanted Lester to provide a bid which he did. Lester was awarded the new contract but immediately found he had a problem. The new management company was a very slow payer on its invoices, taking nearly 60 days in fact. Lester had always paid his guards weekly which meant he would have to fund the payroll for the new guards for roughly nine weeks before the first check came in from Manage Co. With guards required around the clock at all four facilities, Lester would be making payroll for the new guards of over $6,000 per week (168 hours per week x $9 per hour x 4 facilities). He would need to make that payroll for 9 weeks or come out of pocket nearly $55,000 before he received Manage Co’s payment on the very first invoice.
Lester simply did not have that kind of money available and unfortunately, had no ability to borrow more using his HELOC. He did, however, remember meeting a small business finance specialist named Jerry Goggins at a recent Chamber of Commerce meetup. Jerry and Lester had discussed the possible use of something called factoring to finance Security Plus if it ever became necessary. Well, it had suddenly become necessary and Lester made a call to Jerry.
After the call, Lester and Jerry met for lunch to discuss financing and Jerry quickly recognized that factoring would solve this problem. Jerry worked with a factor that specialized in service sector finance and he knew the factor’s flat fee rate was about 5-6 percent for 60 days. Lester had over a 50% profit margin on his services so he could easily absorb the factoring fee. After lunch, Jerry went back to Lester’s office and they made a quick call to the factor who was immediately available to discuss a factoring arrangement.
On the call, the factor asked about the business loan and was assured it was secured by Lester’s home and not the business assets. The factor gave Lester a tentative rate of 1.25% for 15 days which meant the 60 day payment would only be charged 5% but it also meant Lester could factor all of his other receivables, which were usually paid in 30 days or less. All in all, Security Plus would be financing about $120,000 per month.
Lester’s finance problem was solved. Jerry, because of his relationship with Lester, now would earn a monthly referral commission from the factor. BROKER FACTORING COMMISSION EARNINGS: $400 – $600 per month.
Cactus Jack’s Custom Tanks
Jackson Sprockett, better known as “Cactus Jack”, was a metal fabricator specializing in custom fenders and fuel tanks for motorcycles. He started Cactus Jack’s Custom Tanks in 2010.
Jack was an expert in the use of an English wheel, a special tool used to shape sheet metal, and had become well known in the custom bike community after being featured in a well-read biker magazine with national circulation. Business had picked up dramatically after the article and his shop was always busy, although primarily for one-off custom fabrications for individuals.
Shortly after the featured article, Jack was contacted by a regional motorcycle custom parts supplier about supplying an exclusive line of “Cactus Jack” fenders and tanks. The supplier had 37 stores and would be carrying “Cactus Jack” inventory in each along with special order options. They estimated they would need about $3,000 in tank and fender inventory in each store monthly or a little over $110,000. Terms of sale would be 45 day net which gave the supplier ample time to sell the goods prior to payment.
Jack was delighted with the prospective order but his was a small custom shop and he would need to hire at least one additional aluminum fabricator and one gas welder skilled at thin gauge aluminum welding. Neither would come cheap. He would need some payroll financing because of the 45 day terms of payment required by the supplier.
Jack’s brother had a local janitorial service that had been using something called factoring for years to finance its payroll and he wondered if factoring would also work for him. He called his brother and got the phone number of the factor and made a call.
On the call, Jack explained the opportunity to his brother’s factor who quickly looked at the credit rating of the parts supplier. It was excellent and would be enough to provide a credit limit of $100,000 so that Jack could finance 100% of the supplier’s invoices. Jack had no bank financing in place so the factor could enjoy a secured 1st lien position in accounts receivable which is always required in factoring.
The factor assigned an account executive to the account and the Jack received a factoring contract (called a Master Purchase and Sales Agreement) via overnight courier. He quickly executed the contract and returned it to the factor. Cactus Jack’s Custom Tanks could now comfortably hire the two new employees needed to fabricate the quantity of tanks and fenders needed to meet the new orders.
BROKER FACTORING COMMISSION EARNINGS (Had one been involved): $350 – $450 per month.
Ziggy’s Welding Specialties
Dieter Ziggens started Ziggy’s Welding Specialties in Tampa, FL to provide onsite welding services for construction equipment. Ziggy’s has grown rapidly since opening in 2005 and currently has two (2) mobile welding trucks to provide services to local contractors.
Dieter Ziggens was pleasantly surprised to receive a call one day from a national steel building contractor in need of mobile services. The contractor was beginning operations in Florida and would need an onsite mobile operator for at least the next 24 months to service new steel building being erected. The hourly fee offered was exceptional, however Ziggens would need to submit a single invoice each month for all work completed during that calendar month. The invoice would then be paid within 30 days. That meant Ziggens might have
to wait as long as 60 days to be paid on some work. Additionally, Ziggens would likely need to outfit another vehicle just to handle the steel building contractor’s additional business which was estimated to be $100,000 per month. Ziggens was already billing about $150,000 per month with local contractors who paid in 30 days or less. This new business meant billings of roughly $250,000 and Ziggens decided to talk to his banker about a loan.
At a meeting with a loan officer at his local bank, Ziggens was given the unfortunate news that the bank would not be able to help since they only offered real estate financing and not asset-based loans. The loan officer said it really sounded like Ziggens could use something called factoring and he provided Ziggens with the name of a local consultant he had referred business to before that specialized in factoring for the construction industry.
After leaving the bank a little worried, Ziggens called the consultant who met with him that afternoon. The consultant agreed that so long as the steel building contractor’s credit was good, factoring would do the job and a conference call was set up with a factor for later that afternoon.
On the call, the factor quickly researched the credit of the steel building contractor and found it was good. He also requested an accounts receivable aging report to pull credit on Ziggens’ other clients. Once received, he would provide Ziggens with a “Terms Sheet” with pricing.
Within 48 hours, Ziggy’s Welding Specialties was provided with a $250,000 factoring credit facility. Ziggens would now be factoring all of his invoices and the factor would act as his accounts receivable finance and management team. At an average discount rate for services of 4%, the factoring fees would be little more than accepting a credit card and Ziggens could now hire additional staff as well as purchase and outfit an additional vehicle. FACTORING COMMISSION EARNINGS: $1,000 – $1,250 per month.
The Simplicity of Factoring
Case studies and examples like those above can help factoring brokers to understand two important factoring characteristics:
- SIMPLICITY: Factoring is one of the most simplistic form of commercial finance and a factoring financing arrangement can be put in place with just a few days.
- AVAILABILITY: Factoring is available to almost all types of businesses operating B2B…even startups and early stage operations
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