How Small Businesses can Benefit from Invoice Factoring with Earl from Now

Speaker 1: 0:10

Welcome to the funded podcast, where we dive into the details of how businesses really start, grow and operate. We'll hear from experts like Earl here today that can guide us to make smart business decisions in finance, marketing, managing people and everything in between. I'm your host, stephanie. I'm the CEO of funded, where we're on a mission to make business finance simple, easy to understand and connect the smallest businesses to the capital they need to grow. Today I'm chatting with Earl Kamp, who's in business development at now, and we are going to talk about invoice factoring. So to kick us off, earl, what even is invoice factoring?

Speaker 2: 0:50

Well, invoice factoring unfortunately most people don't realize has been around for hundreds of years and invoice factoring is a form of alternative financing that allows a business owner to essentially sell their invoice or accounts receivable to a third party, which is considered a factoring company.

Speaker 1: 1:09

Okay, I have some questions there because I'm like taking a step back to my early days in business and I'm like, would I get this? And so, okay, you're talking about it invoice. So meaning me as the business owner has an invoice I'm sending to a customer, right? So I have to have customers that I send invoices to. And usually when I send those invoices to customers so say, I'm a marketing company and I charge $5,000 a month for my services, I send my client a $5,000 invoice. In that client at least for mild marketing company had 30 days to pay that invoice To me. News day factoring. I would then like you now, as an invoice factoring company or what invoice factoring is, can take that invoice and essentially like create a loan to me on it.

Speaker 2: 2:00

Okay, no, that's a really really great question. So not really alone. What typically happens is that a factory company will purchase that invoice from you and what that allows you to do is to receive funds or cash as soon as you deliver the product or service to your customer. So in the example that you mentioned, steph, is that you have a $5,000 invoice and you have net 30 terms and let's just say the transaction fee associated with that invoice is 3%. A factory company would then charge you 3% for the amount of that invoice based on the payment terms. So in that case it would be a $150 transaction fee associated with that invoice. But most factory companies also do what they call charge a holdback. So you will actually get 90% of that invoice in addition to that 3%. So they will hold back, for instance, in that case, $500 associated with that invoice in addition to the 3%, which is 150. So you would receive the $5,000 less the $500 and the $150 typically pretty quickly, and that way it allows you to go ahead and move forward with the next invoice so you can pay your employees, pay your suppliers and move on from there. But it's not a loan, it's typically just their buy net invoice for the right to advance you the funds upfront.

Speaker 1: 3:29

Okay, that makes sense. So not technically a loan, but in the simplest terms gets cash in my business bank account really quickly for whatever I might need it for, Because there's a good chance I'm going to have bills and payroll and everything before that client pays me the $5,000. And this kind of helps bridge that gap.

Speaker 2: 3:49

That's correct.

Speaker 1: 3:50

Okay, I want to take a step back for a second. You say invoice factoring has been around for a really long time. I think I only heard of it for like a year, and it's probably because I'm in finance now, Otherwise I don't know that I still would. So it's like what is its history? How has it been around all this time and why do we not know about it?

Speaker 2: 4:10

Yeah, it's typically been in the retail space, and reason why that it has been is because you think about, historically, companies that provide goods to large retailers whether it's a clothing business, they are producing, manufacturing clothing. They then send the clothing to a large retailer who sells that and a lot of times in the past what would happen is that that retailer would not pay that manufacturer for their goods until the product was actually sold. So if you're that manufacturing company, you still had to pay your employees, you still had to pay for the goods that actually help you produce that product that you were selling to that large retailer partner that you had. But you had to wait and so this product was solution was created to address that. As you said, I would say the reason why more of us have heard about it more recently is because the usage of factory has now gone well beyond that industry, so it's going into other industries where individuals will have a contract that they're awarded, or purchase order or an invoice, and they still need to pay their employees, they still need to keep the lights on. So that's why now it's become a lot more popular in other industries.

Speaker 1: 5:28

Got it Okay and before, like, let's call it a revolution in factoring. Who was doing this? Was it through banks, or was it always kind of through alternative financial groups?

Speaker 2: 5:39

Yeah, so you've got factoring, quote unquote what were considered factoring companies that did it, but then also banks were involved in factoring. A lot of times people didn't even realize some of these larger banks were providing the solution to their clients, and some of them still do. Typically, banks have provided the solution to really large businesses and I think the companies that you serve and do a great job of doing that has now become a lot more popular with the smaller businesses that have the same need that large businesses have. And, as you can imagine, a small business that is told by a large customer that they have to wait 30, 60, 90 days, you know that news typically isn't received well by that entrepreneur because he or she still has to run their business, just as a large business has. And a lot of times, I hate to say it, large customers will tell a small business that knowing they have more leverage, and that's why factoring has really become a lot more popular in recent years.

Speaker 1: 6:36

That's so cool though, because, as you were saying that, what I was thinking is, like before this was available to the masses, doing business with big players was really limited, right, like it was. Like you know, the idea of it's very American the rich playing with the rich, all getting richer together, like, but in corporate America. And so if, like, invoice factoring can create a way for a small business to play in a target, we're seeing a lot of smaller brands now in big box stores like Target. That's like a game changer for small business.

Speaker 2: 7:10

It is and, as you said example that you just mentioned, target, for instance. They have now expanded their base of suppliers or product manufacturers, in which are great products and these are some of the products that you and I and our families are using and we find out about them maybe online that typically have been direct to consumer. But once a target or another large retailer finds out about it, they want to get it out to the masses as well. But what happens is, when that product manufacturer goes into a target, they're no longer receiving the funds as soon as that product gets purchased, as they do if they're offering it direct to consumer. So when Target or someone else buys it, you know they're telling them hey, we're excited about working with you, but we're going to pay you in 30, 60 or 90 days, if not even further out.

Speaker 1: 7:57

Yeah, that sounds expensive. But you also, like, highlighted another point. There's been this revolution in in retail products, the direct to consumer approach, and I know this. Last year there's been a lot of talk about direct to consumer products now doing brick and mortar, and people are like, oh, they're doing it backwards. And I'm like, or were we doing it backwards to start? Because it's like getting like a customer base that pays you directly first, if that's the way you normally pay, like would actually make more sense, cool, ok. So, thinking about this and how it works, what kind of businesses you know we started with like retail, but now there's a lot more out there in this space. So talk to me a little bit about what kind of businesses are leveraging or are good fits for invoice factoring and what are the benefits to those business owners.

Speaker 2: 8:49

Yeah. So I would almost tell you, almost every industry is using Factoring Town. We talked about the retail side, but any type of manufacturer if they're reducing an item, selling it into a large other company or manufacturer. So, for instance, if you are building or creating an auto part but you're selling it to a large auto manufacturer, they're using factory. If you are a service based business and staffing, where you get hired by a large customer and you're providing temporary staffing to them, they have to wait, just as you would any other industry company serving large customers. They have to wait as well. And then I would say the other, a big one is construction. You know you have a big outlay of where you're providing those individuals that are helping to build, whether it's on a project and the like and you are providing bodies to help build out a project that they're working on. That's another. So I would tell you, I've seen companies across the board, even those who are selling products, because when we think about products in retail, we forget about someone who's producing a product and they could be selling it to a hospital, they could be selling it to a large corporate entity, it's so it really doesn't matter almost every industry as long as it's a invoice involved in their payment terms, there is an opportunity for them to potentially use a solution like factory.

Speaker 1: 10:15

Okay, awesome. So if I'm a small business considering invoice factoring, can you talk to me a little bit about the cost associated with it and how I should think about those costs?

Speaker 2: 10:26

Yeah, so cost associated with factoring and typically the most obvious cost is that transaction fee that is based on the payment terms associated with the factoring. So that's really the fee that the small business owner is being charged to receive those funds or cash almost immediately to do that. So that is, you know, for instance, if it's a 3% fee on the total amount of the invoice, that's one charge. The other is if there's what's called a whole back and that's really that fee that a factoring company will charge, for instance as protection for when the payment comes in, based on the timeliness of the small businesses customer when they pay. And then there's some other fees that could be hidden fees based upon the factoring company that they're working with that they may not always make transparent to the small business owner whether that's penalties associated with late payments if their fees aren't coming in on the time agreed to on the invoice. Another fee may be cancellation fees. If, when a small business owner signs that agreement with a factory company so if you sign a one year agreement and six months in you decide you no longer need to service, there could be some cancellation fees associated with that or monthly minimums If you had agreed to a certain amount of invoice volume and you're not meeting those minimums, there could be additional fees associated with that as well.

Speaker 1: 11:58

I could tell that you're kind of annoying with this hidden fee topic. Yes, I am, yes, I am as anyone like, and that's the beauty of what's happening in finance right now, especially fintech, is many of us are in it because of these little things that just kind of annoy us about how things have always got. Yeah, those are tricky topics too, because it's always in the fine print. Generally you're, you're emotionally already like across the finish line, yes, and so it's easy to like justify, overlook, or yeah you bring up a point.

Speaker 2: 12:33

I mean it's all about transparency and, as you said, in this day and age you would think that some of these providers would be more transparent, you know, with the fee structure, but unfortunately they're not. And, as you said, a small business owner will get to that finish line getting ready to receive those funds and they're so excited to do that they may overlook or it's just not disclosed in a very transparent way during the process, unfortunately, yeah, Okay.

Speaker 1: 13:01

Small business owner I'm keeping that hat on. I have invoices. I want money today because I have bills like I need cash flow. How do I qualify?

Speaker 2: 13:12

So, depending on different factory companies have, I would say, different criteria they may look at. Some of them look at small business credit score of the business, which is one factor, no pun intended when evaluating the small business how long they've been in business, how much cash flow that they're generating. But another piece associated with that is the small business's customer, because the end of the day, that factoring company is really looking at the risk associated with the small business's customers ability to pay. So that's another piece as well. So that is another piece that a lot of times that small business owner doesn't realize. It's not really all based on their business, it's also based on their customer as well. So if their customer has a history of paying maybe not in a timely manner, but they will pay then a factoring company or another alternative financing company may be looking at it and say, okay, great, you've got a company with known history, publicly traded company, or they've been around for decades. We can look at that history in the marketplace and that means it's a good risk for us to be able to work with you.

Speaker 1: 14:25

Okay, let's pretend like I'm the tiniest little business ever, which I kind of am. In reality, that like barely makes money. What should like be on my mind is like okay, I'm not even going to waste my time in this space unless I hit these minimums and I get that. Everyone's different, but what's kind of the rule of thumb there?

Speaker 2: 14:44

Yeah, believe it or not, some small businesses that if they have been in existence for a year and have generated minimal amount of revenue and when I say minimal it could be as low as maybe $25,000 or $50,000- annually or monthly. If they've done that and they can show that you know, be able to provide proof of that, a company may be willing to work with them. And, like I said, because what a lot of small business owners don't realize, that's one piece of the puzzle. The other piece of the puzzle is who their customer is. So that really kind of balance out the risk that the factory company's looking at. So it really starts to dig in and look at. Like you know, we can see that you're a viable. Concern You've been growing your business, as you and I were talking about, is that you could have been someone who was selling online, generating income, but now you're getting that first big order from a larger customer, whether that's a retail customer or if you're a coffee company selling into a large corporate company that wants to just provide coffee to their employees. So now you're like you know what? Maybe it's time for me to look at another solution to help me with that growth.

Speaker 1: 15:54

Okay, question Do my expenses as a business owner relative to my revenue matter?

Speaker 2: 16:02

Yeah. So what I would say is, regard to the expenses, what a company may look at when you share that information with a company that you're considering working with. But they want to look and see whether or not you know your cash flow, your ability to manage your cash flow, as far as expenses versus your revenue. But the other piece is important for you as a business owner to understand your expenses and the margin associated with how much you're making, with whether or not the factoring fees fit into your business model, because if you're going to be paying a percentage now to accelerate the payment on that invoice and you have very, very tight margins, factoring may not be that short-term solution for you to be a good option for that invoice and a lot of times that really just depends on the business. You know. If you're selling into a retail partner, you may have tighter margins than maybe a service based business who's offering staffing, and so that business owner may need to rethink their margins or the expenses associated with providing that product or solution to that large customer before looking at working with a factor in company.

Speaker 1: 17:11

Yeah, you unintentionally brought up such a good point to you that it's my pet peeve, one of my mini pet peeves. I have a lot of them in small business, which is like, who is the person out there that told all these small business owners to go out of their way, to not be profitable, as if it's like the worst thing on earth to have like a positive net income on your P&L. There seems to be this sentiment in small business that it's like oh, I'm not supposed to, like I need to run everything through it so that I don't ever pee taxes or whatever the reason might be, and it's like, yeah, but you're also limiting your growth and your ability to get loans and all this stuff. Like, if you find that person, tell them to stop.

Speaker 2: 17:53

Stop, yeah, definitely. You and I both want to all stop and stop, and then the small business owners to stop taking that advice, because you didn't get in business to lose money, you get in business to make money. Something to always remember, definitely.

Speaker 1: 18:07

I know. I remember I got early advice in my entrepreneur journey. I don't remember who it was from, but they told me if you're paying taxes, it means you're making money. That's a good thing, yes, it is, it doesn't mean you want to. You know, like taxes. That's a whole different conversation, but it's a pretty simple rule of thumb. Yes, okay, let's pretend like I made it through your process, I got approved, I'm able to do invoice factoring. How quickly could I receive those funds? Like what does that timeline look like?

Speaker 2: 18:34

Yeah, so once a company as they're working with you and you have your invoice and if that invoice is confirmed with your customer, typically you receive those funds within 24 hours. So that goes now from you having to wait 15, 30, 60, 90 days to actually receiving the funds or cash within 24 hours. That's a game changer. So as you go through the process and you're anxiously waiting to finish the process, and once that invoice gets uploaded, you still send that invoice off to your customer. But once that invoice is confirmed, you typically receive those funds within 24 hours.

Speaker 1: 19:14

Okay, and so if I'm thinking about taking this journey, I'm assuming I should think the initial setup, the initial like approval, is going to take some time, like there's going to be some backup for them and I have to provide some information. But it sounds like invoice factoring is usually an ongoing relationship. So say, I use now as my partner, I make it through the process I'm set up and then going forward. It's more just like me logging in, uploading new invoices and then hopefully getting funds within 24 hours.

Speaker 2: 19:47

Yes, as you said you would still typically is an ongoing relationship, and then also, as you bring on new customers, then you would also start to upload those customers into your account as well, so those customers can get approved and then that's a much faster process once you get an account set up. So there's history built up with us. We can see your history, we can see the payment history from previous customers. You know the process. You're now working with an individual who's been assigned to your account and then you start uploading those new customers. As you're growing your business, bringing on new customers, and as you get those customers approved, you just then upload those invoices to your account and as you work with your account manager client service manager they help you throughout that process as well.

Speaker 1: 20:35

Great. And then, as a business owner, will invoice factoring affect my personal credit or business credit?

Speaker 2: 20:42

So it does not affect the business or personal credit. The only thing we try to tell those business owners is that everything is great as long as you're delivering the product or service and your customer is paying relative to those invoices. Even if the customer that you're working with, even if they're paying their invoices late, that does not affect the small business owners credit at all. That is taken into account when you're working with a company. Now, if the product or service isn't delivered and then there's a dispute and then there's a judgment or something like that, then that could potentially have an impact on the business, but outside of that, it does not do that at all.

Speaker 1: 21:29

OK, cool, that's great news For a lot of small business owners. When I'm looking for an invoice factoring partner I get you might be biased on this and we'll get into that too how do I choose a partner, or where do I even start? I'm assuming, like me, I'm going to type it into the Google box, or I mean I think I'm assuming a lot of people accidentally stumble upon this, because I know, as a small business owner, I usually start seeking out solutions like this when things might not be looking so good for me. So how do I find a partner and choose one?

Speaker 2: 22:03

Yeah, what I would do. One is you know I'm going to be biased from a standpoint of one going to a resource such as the one that you guys have created to go online and look and compare and look for credible companies that are out there. But if you're online searching, really, at the end of the day, what you want to do is make sure that you go to a company that publishes their rates online.

Speaker 1: 22:26

That's a good tip.

Speaker 2: 22:27

Yeah, if their rates are not online, that may be a red flag for you. The other is is that, once you do that and you start speaking to an individual that works for that company and they provide those rates to you, ask them questions like are there any late fees associated with it? Am I penalized if my customer pays late? Is there what's called? Are you providing a solution that is non-recourse versus recourse? Non-recourse basically means that there's not going to be a negative impact on you as a business owner, but if it's a recourse solution, it could potentially land on at the feet of the business or that business owner. That's something you know where there's personal guarantees involved, very similar to a loan. So that's something you want to be well aware of as well. And then, if there are the cancellation fees, are there monthly minimums? Everybody does not charge those or enforce those. So you really, really want to think about that as you're out there searching and looking for a solution.

Speaker 1: 23:29

Okay, I like the recourse versus non-recourse. It reminds me of how, when you're like buying your first house and signing your mortgage and going through the paperwork, you send the one form that says that you're open to counseling.

Speaker 2: 23:41

Yes.

Speaker 1: 23:42

Pretty sure is not counseling how I think about it? Yes, recourse, I'm going to look for that one. Okay, I want to talk about now. But last question before that what are the biggest risks to the business owner in taking this path? Like what could go wrong.

Speaker 2: 23:59

Yeah. So what I would really say what would can go wrong when you're using a solution like this is that if you don't fully understand the relationship and I hate to say this a lot of times there's buyers remorse. When someone is working with a alternative financing company, whether it's a factory company or someone else One is that understanding that when you're working with a solution and you're going to be getting money advanced on your invoices, that partner that you're working with is going to have communication with your customer. It's not going to be hidden. So know that going into that relationship. Yeah, you got to be comfortable with them, you got to be comfortable with that and most large companies are well aware of these types of solutions. They know that companies use these solutions because they know the payment terms that they have enforced or they've offered and I say that word loosely offered to you as a small business owner that you're probably going to use a solution to help you be able to deliver that product or service that they have awarded to you via a contract. So know that there's going to be communication with your customer. Know that going in the other is like I said, it's those hidden fees and knowing that how that may impact your ability to make money. So if you're comfortable with the fee structure associated with using a product light factory, then I always say you should use it. If not, if you have very, very tight margins, what you don't want to do is use a solution to deliver your product or service and not be able to make money at that point. So that's what I really warned a small business owner prior to using and finding a partner to help you do that.

Speaker 1: 25:48

Okay, thank you for that. On to now. I would love to hear about, like, what is now doing to participate in this. What do you all do?

Speaker 2: 25:56

Yeah, I appreciate you doing that. As I said, now, it's been around since 2010,. Founded by two amazing women who are entrepreneurs themselves, so they always say that they created the business out of a need for their small business. We primarily work with small businesses that are experiencing growth. A lot of times, people think that when they're using a solution like ours, it's someone that's in trouble, but it really is not. It's when someone has been awarded a contract and they realize I need a financial partner to help me with that now, whether it is a loan, whether it is something like an alternative solution similar to factoring. That's when they come to us, so they have the need to be able to accelerate payments on their accounts receivables, whether they're working with another business, whether that's a large company or even a government entity. So when they get awarded that contract and, all of a sudden, reality sets in as like oh my God, I now have to wait 15, 30, 60, 90 days and, believe it or not, net 120 for certain businesses. You can't wait to do that and effectively run your business and manage your cash flow and, like I said, we work with hundreds of businesses throughout the United States, whether they are serving other businesses, both domestically and internationally. We work with all types of businesses in various industries, ranging from product manufacturers to staffing companies to IT consulting firms and everything in between.

Speaker 1: 27:32

So cool. I'm so glad you all exist. I love all these companies serving small business. Everyone in the ecosystem is so needed. There can't be enough of us, so thank you so much for being here today. We will put all the information on how to connect with now in the show notes on our website. They're already on our site and our lending partners. But if you're listening, thank you so much for tuning into the funded podcast. We hope you found this episode informative and helpful On your business journey. Don't forget to subscribe to the podcast. Follow us on social for all our other information and if you are a small business looking for funding, visit our site, getfundedcom. We help you understand and break down different lending options to find the one that's right for you. Otherwise, we'll see you all next week. Muchgasp near you.