On the Trail to Recovery NACM TRMG Meeting, Ft. Worth, October 19, 2009 Everything You Wanted to Know But Were Afraid to Ask About Factoring

On the Trail to Recovery NACM TRMG Meeting, Ft. Worth, October 19, 2009 Learn how factoring allows a company to outsource a wide range of credit and financial functions. Gain knowledge in how companies can increase profits, enhance overall growth, and maintain complete control of outsourced business.

On the Trail to Recovery NACM TRMG Meeting, Ft. Worth, October 19, 2009 Brief History What is Factoring? Recourse vs. Non-Recourse Factoring vs. A/R Lending How Does Factoring Work? Why do Companies Factor? What Factors Look for in Establishing New Clients? The Factoring Process Establishing a Productive Factoring Relationship Questions?

On the Trail to Recovery NACM TRMG Meeting, Ft. Worth, October 19, 2009 Brief History Factors originated about 2000 years ago during the Roman Empire. Worldwide growth of the English textile industry in the 14 th and 15 th centuries resulted in an importance of factors. 16 th century brought new opportunities for factoring, especially for those who established operations in America. Late 19 th century, Factors began focusing on credit, collection, bookkeeping and financing functions. Mid 20 th century, American factoring evolved to include new and developing industries. Today, factoring has expanded into a variety of service industries including freight transportation, staffing of temporary employees, advertising, graphic arts, government contracts, medical, construction, etc.

On the Trail to Recovery NACM TRMG Meeting, Ft. Worth, October 19, 2009 A recent International Factoring Association survey of factoring companies revealed Transportation as the largest single industry utilizing factoring services.

On the Trail to Recovery NACM TRMG Meeting, Ft. Worth, October 19, 2009 What is Factoring? The outright purchase and sale of accounts receivable at a discount from their face value. Factoring involves a transfer of assets rather than a loan of money. Factors look primarily to the quality of the asset being purchased (collectability of receivables). Accounts receivable normally refers to short-term commercial trade debt having a maturity of less than 90 days. Distinguish between invoices and purchase orders. Factors generally refuse to purchase “pre-ship” invoices.

On the Trail to Recovery NACM TRMG Meeting, Ft. Worth, October 19, 2009 Recourse vs. Non-Recourse Recourse factoring is most common among companies providing services to transportation industry. Under recourse factoring, the seller typically has to repurchase uncollected receivables once they reach 90 days old (sooner if contractually required). Non-recourse basis is where the factor assumes the risk of loss due solely to the financial inability of an account debtor. Recourse factoring is much more cost efficient for the seller than a non-recourse arrangement.

On the Trail to Recovery NACM TRMG Meeting, Ft. Worth, October 19, 2009 Factoring vs. A/R Lending Occasionally confused but differs legally and operationally  Legal – Factor takes immediate title to invoices purchased. A/R Lender only takes title if the borrower defaults on loan agreement.  Operational – Factor concentrates on the aging, collection and cash posting of each factored invoice. A/R Lender does not track payment status of each individual invoice.  Contact with individual account debtors  Collecting invoice payments and lockbox accounts  Overall program cost  A/R lending programs can be harder to obtain since lenders normally expect greater financial strength from borrowers.

On the Trail to Recovery NACM TRMG Meeting, Ft. Worth, October 19, 2009 How Does Factoring Work? Advance / Reserve – most widely practiced form of factoring.  At time of purchase, the factor immediately pays the client a percentage of the face value (“advance”).  After successful collection of payment from account debtors, the factor subsequently remits the balance of the invoice (“reserve”) to the client minus the factor’s fees.  Flat-fee plus interest – common among large factors or larger transactions  Client pays a flat processing fee on all factored invoices then draws advances as needed. Factor charges interest on the advances at some number of points over prime.  After collecting payment from account debtors, the factor remits the outstanding reserve balance to the client after deducting its’ earned fees.  Other types – Maturity, Bankruptcy, Guarantee

On the Trail to Recovery NACM TRMG Meeting, Ft. Worth, October 19, 2009 As a rule, factors require a first priority collateral position on both factored and non-factored receivables. Factors typically prepare a Notice of Assignment letter and have each client and the Factor sign. These letters are mailed to every account debtor notifying them the invoice(s) has been sold to the factor and where to remit payments. Generally, factors also ensure some other type of notice is included on/with each factored invoice to reinforce the factor’s position with the client. Once notice has been received by an account debtor, all payments are required to come to the factor until written release from the factor is received. Most factors require their release to be notarized to be valid. Personal guarantees – most factors require against all factoring losses, regardless of the cause. Verification / confirmation of invoices

On the Trail to Recovery NACM TRMG Meeting, Ft. Worth, October 19, 2009 Why do Companies Factor? Factoring is widely misunderstood by many business people who continue to view it as a tool of last resort for companies with terminal financial problems.  Opposite is actually true – companies on a terrible downhill slide make poor factoring candidates because they present a level of risk most factors wish to avoid. Businesses most frequently factor in order to finance sales growth or as a bridge to future debt or equity financing. Factoring is best seen as a dynamic financial tool that enables growing companies to accelerate and stabilize cash flow. Advantages of factoring over traditional bank financing or asset-based lending include:  Improved Cash Flow  Increased Sales  Availability  Flexibility  Cost / Benefit  Value-added services

On the Trail to Recovery NACM TRMG Meeting, Ft. Worth, October 19, 2009 What Factors Look for in Establishing New Clients?  How collectable are the client’s invoices?  Credit losses?  Debtor disputes?  Direct payments to clients?  Are their outside parties who could interfere with our ability to collect on client’s invoices?  Unencumbered receivables Bank, Prior Factor, Equipment Lessor  How do we recover our advances and fees if the client’s invoices turn out to be less collectable than anticipated?  Personal guarantees  Reserves

On the Trail to Recovery NACM TRMG Meeting, Ft. Worth, October 19, 2009  Operational compatibility  Quantity of invoices  Number of account debtors  Frequency of submission  Originals vs. images  Accessibility and cooperation of account debtors – verification and collection  Invoice Aging and Turnover  Potential Factoring Volume  Contractual Duration of relationship  Client Financial Condition  Client Management and Administration

On the Trail to Recovery NACM TRMG Meeting, Ft. Worth, October 19, 2009 The Factoring Process  Factor approves client  Client submits invoices to factor  Factor receives and processes invoices  Factor verifies invoices  Factor disburses advances  Factor notifies debtors  Factor tracks invoices performance and collects payments  Factor deposits and posts payments  Factor disburses reserves to clients  Factor reports to clients

On the Trail to Recovery NACM TRMG Meeting, Ft. Worth, October 19, 2009

Establishing a Productive Factoring Relationship  In order to minimize problems and avoid disruptions, companies needing factoring services should:  Be very clear about objectives for using the program  Find a factor who’s program best suits the company’s needs  Make sure to clearly understand how the program works both operationally and financially  Be sure the company can comply with the factor’s program  Designate at least 1 staff member to manage day-to-day interaction with factor.  Closely monitor the performance of the portfolio.  Respond in a timely fashion to the factor’s request for information.  Inform the factor immediately whenever account debtors incorrectly send payments directly to your company.  Avoid crisis cash flow management.  Use the funds obtained through factoring wisely to accomplish stated objectives.

On the Trail to Recovery NACM TRMG Meeting, Ft. Worth, October 19, 2009 QUESTIONS?