Search:

Would you like to contribute to this site? Factoring Menu Submit an Article Submit a Tip Place your Ad Add URL Factoring Questions? Contact Us  Factoring Financing   Types of Factoring   Invoice Factoring   Invoice Discounting   Receivables Factoring   Medical Receivables   Freight Factoring   Trucking Factoring   Factoring Forfaiting   Factoring Companies   Factoring Business   Cash Flow   Cash Flow Financing   Accounts Receivables   Receivables Collection   Working Capital   Business Capital   Invoice Financing   Commercial Financing   Business Financing   Business Funding   Small Business Funding   Structured Settlement Funding   Asset Based Lending   Small Business Loans   Commercial Finance   About Factoring

Return To Factoring Article Archive   Invoice Factoring in a Slowing Economy By Kent Harlan The invoice factoring industry is expected to grow substantially as the economy continues to soften. The threat of a recession will likely increase demand for the service. The onslaught of the sub-prime mortgage crisis and the high rate of adjustable rate mortgage resets in the next two years are added variables to an already slowing economy. Because of the predicted slowdown, invoice factoring companies face a mix of incredible opportunities and potential danger. If a recession does occur, there will likely be a shakeout in several industries. Some sectors are already getting hit hard, such as construction, property management, and building supply manufacturers. However, it often difficult to determine who else will suffer before it actually occurs. That\'s why it\'s very important for lenders of all types to upgrade its underwriting processes and structure. Of equal importance is the need to have effective monitoring systems in place to detect if a company is just going through a natural down cycle or if its very existence is threatened. It is important for a factoring client to understand that the enhanced underwriting and performance monitoring processes are not just a way to limit the funding company\'s exposure. They are also valuable tools that can help the firm maximize results and even keep it from extinction. Evaluating a company\'s current financial stability In the early 1960\'s, Edward Altman developed a statistical model for determining a company\'s financial health and a predictor of bankruptcy that is still used today. Called the Altman Z-Score, it uses five financial ratios comprised of eight items from a company\'s financial statements. The five ratios and weighted average for each ratio in relation to the total score as follows: Ratio Weighted Average EBIT/Total Assets 3.3 Net Sales/Total Assets 999 Equity Mkt. value/Total liabilities .60 Working Capital/Total Assets 1.2 Retained Earnings/Total Assets 1.4 After inserting numbers derived from a company\'s balance sheet and income statement and coming up with the total, the model asserts the following: A Score over 3: reflects a company on solid footing Between 2.7 and 2.99: The factoring company should exercise caution and require increased monitoring. Between 1.8 and 2.7: There is a good chance of the company going bankrupt within 2 years. Less than 1.8: 94% chance that the company will need to file bankruptcy within the next year. The Z score is just one tool in the underwriter\'s arsenal to determine if the company is a good (or poor) candidate for invoice factoring. Other fundamental methods should be used in conjunction with the Z-score such as financial trend analysis of revenues, expenses, and profits. In addition, there may be internal and external factors that could change the ratios in the future such as new product roll-outs, mergers, and new competitors in the industry. Monitoring results The factoring company should constantly monitor results, preferably monthly. If two or more of the ratios used in the Z-score are reflecting an adverse trend, the lender should meet with key company personnel to discuss strategies for improvement. Again, the client should understand that these aren\'t bullying tactics. The meetings are essential to the company\'s viability. If it is determined that performance improvements are unlikely to occur in the near term, the client should be referred to a turnaround specialist. These type of companies are adept at structuring a very disciplined and urgent solution. Kent Harlan, a CPA since 1984, is the owner of Ozarks Capital Funding, LLC, a company that focuses on providing a number of financial services, including factoring, equipment leasing, and healthcare financing. Does your business need working capital? Click here for a quick factoring quote. Website: http://www.ocflink.com email: kenth@ocflink.com Phone: (417)849-7394 keywords: invoice factoring | accounts receivable factoring | working capital | cash flow | receivables funding Commercial Loan Financing

Get your Factoring questions answered... Subscribe to our Factoring Newsletter FREE! Your First Name: Your Email Address: Enter above security code

Home  |   Factoring Blog  |   Ask the Factoring Expert  |   Factoring Archive  |   Factoring RSS Feeds  |   Advertise  |   Sitemap