KEVIN O’FLAHERTY: Our topic today is going to be factoring, which is an alternative way to get financing for your business. Kim is going to explain what factoring is and how you can use it to get funds for your business.
KIM BUKOVSKY: Correct.
JIM WASZAK: Now, why don’t we start with that. Give us a brief overview. What is factoring exactly?
KIM BUKOVSKY: What is factoring. Well, factoring comes from the olden days of giving you a sale discount of an invoice. A business owner that has an invoice or bill of sale, and they need the cash advance or some type of working capital, it’s an option for the business owner. We discount the invoice and give them a cash advance. Invoice factoring it’s called. So you need an actual invoice and a bill of sale.
KEVIN O’FLAHERTY: This only works in particular industries, right?
KIM BUKOVSKY: Yes, that is correct.
KEVIN O’FLAHERTY: So I can’t just -- It’s not me selling you all of my accounts receivable. Like a law office that has $100,000 in accounts receivable. It would be different for me to say, “Okay. Give me $0.50 on the dollar, and you can collect these.”
KIM BUKOVSKY: Right. Invoice factoring is business-to-business transactions. You’re a business owner; you’re dealing with another business. And we’re offering that discount for that invoice. We have done law firms before, but they have to invoice another business.
KEVIN O’FLAHERTY: Okay.
KIM BUKOVSKY: So if you’re large enough, and you’re invoicing per month, and you’re going out to another law firm, and they’re taking 30, 45, 60 days to get paid, we’re able to give you that cash advance.
KEVIN O’FLAHERTY: What sort of qualification do you do on this to find out if it’s a good invoice or a bad invoice.
KIM BUKOVSKY: That’s a great question. The qualification would be based on your customers’ credit. So you are a business owner. You could be in business started for ten years, or you could be a new business started yesterday. So if you’re a new business owner, or an established business, and you have a customer, we rely heavily on the customers’ credit. We determine if we’re going to purchase that invoice based on who your customer is.
KEVIN O’FLAHERTY: Is there a dollar amount that is too low for you guys to work with?
KIM BUKOVSKY: That’s a great question. Again, small businesses. The SBA, Small Business Administration, considers a small business is seven million and under. That’s a large business to me. So we would definitely work with one- to two-million facilities as a small business. Seven million that seems like a pretty decent business. We like to see the small business owners, five to six employees, or maybe just a single owner who’s got a product a service who needs additional cash flow or has gone to a bank. They can’t get that traditional financing; they’re too new; they’re a little maybe distressed. Invoice factoring is an option for them.
JIM WASZAK: So if somebody’s been turned down by a bank, then that might be worth making a call to somebody like yourself.
KIM BUKOVSKY: Absolutely. I think the banks are lending these days, and they’re still a little strict on their requirements. These business owners are going into a bank. They can’t get that bank line of credit, and so instead they have to turn to alternative financing. There’s many alternative types of financing for the small business owner. We’re just one type which is the factoring.
JIM WASZAK: So does it matter if -- Let’s assume my customer has acceptable credit. Does it make much of a difference if I have a thousand ten-dollar invoices or ten thousand-dollar invoices?
KIM BUKOVSKY: That’s a great question. Again, we’re an account management company as well. So if you’ve got thousands of invoices at $10 each or two invoices at $10,000 each, we’re willing to take on that approval based on who your customer is.
JIM WASZAK: Then who actually -- Let’s say that the customer, for whatever reason, happens to run a little late. Who takes that on? Do you take that on our behalf, or do we do it?
KIM BUKOVSKY: Yeah. That’s part of our program and process. We buy the invoice; we give you that cash advance. And then we have this system which is online account management, and so we also become your collections, account management, account status. And if something happens where that customer goes out of business, we still take on that.
KEVIN O’FLAHERTY: So once I’ve gotten the money from you for the invoice, it doesn’t really matter to me anymore whether it’s collected. That’s on you.
KIM BUKOVSKY: Correct.
KEVIN O’FLAHERTY: And if it’s not collected, you’re bearing the risk of that.
KIM BUKOVSKY: Correct. Yeah, we take on that credit risk. Yep.
JIM WASZAK: I guess other than from the standpoint that if your customers keep not paying them, they’re eventually going to stop buying your interest.
KIM BUKOVSKY: Correct. Exactly. Yes.
JIM WASZAK: See, one thing I’ve learned about Kevin and I: We are more than just a couple of pretty faces.
KIM BUKOVSKY: I hear that all the time.
JIM WASZAK: There’s some brain power going on here. Well, okay. I’m sure there’s probably some business owner out there that says that sounds too good to be true. And usually things that sound too good to be true are in some way. Is there a downside or risk or a cost to factoring that might discourage a business?
KIM BUKOVSKY: I think so too. Factoring is a traditional way of invoicing or alternative financing. I really encourage the small business owner to get the traditional bank financing. That would be ideal. It’s less expensive. It’s more beneficial to their working capital. Factoring’s an option.
A typical life of a factorer or of our business is usually about three years. We have people who stay with us for six months to get their cash flow going. Or they can stay 10, 20, 30 years doing it. The downside would definitely be probably the cost. It’s more expensive than the traditional bank line of credit. The paperwork. You really have to have your paperwork in order: proof of service, contracts, all your paperwork of invoicing. We’re trying to get everything online.
But other than that, it’s a great option. We do file UCC filing for first position, and we only take the accounts receivables as collateral.
JIM WASZAK: What is the cost actually using -
KIM BUKOVSKY: It just depends. A lot of the industries -- I think, Kevin, you asked before. We do a lot of transportation; We do staffing, janitorial, any type of service, manufacturing. Those types of companies or industries have certain types of customers.
To answer your question, the price could be anywhere from a 90% maybe 95% advance on that receivable. And then the factoring fee is anywhere from 2% to 5%.
JIM WASZAK: I’ve got an invoice for $100, and you’re going to buy it for $95 less a couple percent. So I might get 93% of my receivable.
KIM BUKOVSKY: Correct. That’s it. That’s the transaction.
JIM WASZAK: Okay. Let me ask this question. Let’s say I’m a smaller business, as we’ve discussed, and I get an order from a solid creditworthy company for $100,000 of stuff. Now, I’d love to take that order, but before I can handle that order, I got to find financing for the $75,000 that I have to buy. Before I can -- Is there a way that would– A PO that you could still do something? Or is that something that’s just out of the question at that point.
KIM BUKOVSKY: There’s many different alternative financing companies. That’s called purchase order financing. Riviera Finance actually only does the traditional invoice factoring, but there’s many companies out there that you’ve got a business; you’ve got a product; you’ve got a service; and now you got a purchase order to place these orders. There’s financing available for that. We don’t do that, but there’s financing available. So now you’ve got money to make that order complete. Now you ship it; you install it; you send it out; and then you invoice it. Then you come back for us for the invoice factoring.
JIM WASZAK: Got it.
KEVIN O’FLAHERTY: So are you a good solution – You say some people stay with you for 3 to 20 years. Probably in rare circumstances, but is that a situation where someone just doesn’t want to have an in-house collection department or send it to collections; and they work with only businesses, and you’re just going to be the person whenever they generate an invoice it goes to you, and then you collect what you can on it, and they get it right away?
KIM BUKOVSKY: Again, you’re a small business owner. You got two or three businesses; you’re growing. You’re not qualified for the bank financing yet. Where do you get your cash flow? Well, instead of hiring an accounts receivable department, accounts payable department, you’re going to hire a company or outsource a company like us to handle those receivables. And then do the collecting, do the follow up, do the invoicing, the billing, all that additional back office support we call it.
KEVIN O’FLAHERTY: You mentioned the size of the company that you’re working with, but what’s the dollar amount of total invoices that it makes sense to go through all the paperwork? Say I’ve got a $3,000 invoice. I’m probably not going to want to run through that rigmarole. What do you see people actually having to make sense?
KIM BUKOVSKY: Well, these days I got to say 10, 20 years ago, it used to be $10,000, $20,000, $500,000 of receivables. But lately people are calling for the $5,000 and the $10,000. It’s a lot of paperwork. We have underwriters; we have verification; we have an entire office that has to support that one invoice.
So you’re right. For a $3,000 invoice, we’d like to see it grow or maybe more business. But we’ll take on anything. I mean, nothing under about $5,000.
KEVIN O’FLAHERTY: Does the percentage that I get paid as a business owner vary based on the volume I’m doing with you or the length of time that the invoice is past due or the credit worthiness of the person that’s --
KIM BUKOVSKY: All of the above.
KEVIN O’FLAHERTY: Okay.
KIM BUKOVSKY: Yeah. There’s a program for monthly volume; there’s a program for how quick it gets paid; there’s a program for who your customers are. All of the above. Absolutely.
That’s why I like to, with any small business -- You want to meet with them. And you guys know. You want to meet with the business owners, see what their business is about, see if it’s a good fit for alternative financing. Because we are a little bit on the high end.
Then there’s times I’m like, “You’d be qualified for bank financing. You’re qualified for this type of financing; you’re qualified for this.” So I really sit and work with the business owner, determine what’s a good fit for them, and if they’re fit for factoring, they’re a good fit.
JIM WASZAK: Let me get back to Kevin’s question, because that made me think of a question. It would seem to me there’s two possible scenarios. One, is that I have this unusual order. Maybe all my orders are $500 and this one’s $10,000. So I could ask you to just look at that one invoice, but I think the more likely would be once I’ve set up the relationship, then I can just send you whichever one’s I feel I need to send you.
KIM BUKOVSKY: Absolutely. It works for certain industries; it works for certain businesses. It really works for the growing business. So you’re right. You’re one single business owner, and all the sudden you got all these orders in. You do need a company, or you need someone that you’re going to hire. And what better way to get the cash advance, have the back office support. And that’s what you’re paying for. And the credit checks. We’re also credit checking all your new customers all your existing customers. We’re actually a good resource.
JIM WASZAK: I could ask you, “Hey. I’m thinking about doing business with ABC company. Can you check them out?” Then you would do -- is there a separate charge for that?
KIM BUKOVSKY: Nope.
JIM WASZAK: Is that just part of –
KIM BUKOVSKY: It’s all included.
JIM WASZAK: Okay.
KIM BUKOVSKY: Yeah.
JIM WASZAK: So you offer free credit serves?
KIM BUKOVSKY: Yes. And, again, a lot of different companies are different. Riviera started in 1969, been in Oak Brook since 1979, and now there’s a lot all over the place. Because everybody’s lending money or coming up with alternative ways to support the business owner.
I really feel we’re traditional back office support providing as much information as we can to the business to make them successful. Then we don’t mind if they leave us, and they’ve grown, and they’ve gone to the bank, and they’ve become this successful small business. It’s great. We see a lot of ecommerce lately, a lot of Internet, a lot of different stuff.
JIM WASZAK: So there’s probably somebody out there thinking, “Hey, you know what? I got this invoice from Joe Doaks. He hasn’t paid me in 60 days. Hey, I can just sell it for 95% sounds like a good deal.” There’s probably some amount of time that is like a limitation on how late they can wait to give you an invoice.
KIM BUKOVSKY: Um…
JIM WASZAK: Or not really?
KIM BUKOVSKY: Yes, and no. We don’t like 90-day paper, but we’ll buy 60-day paper. I mean, we’re not here to collect on your bad debt. We’re here to manage your account receivables and offer the cash flow solution to your growing business. That’s how you have to look at it.
I think in years in the 70s and 80s, it was, “Okay. Joe Schmo didn’t pay me. I need someone to collect.” But there’s collection agencies for that, or there’s other people. Everyone has a field that they’re experts in. We’re experts in that one.
JIM WASZAK: So it would seem to me that a better candidate for factoring would be somebody who has sort of regular customers as opposed to somebody who’s every sale is a one and done.
KIM BUKOVSKY: Yeah. I definitely, again, get to know the business. The one and dones are fine. I prefer someone ongoing or somebody who wants to leave the traditional bank financing. It’s a great opportunity for them to pay off their bank line of credit and use factoring as again an alternative short-term or long-term option for them.
KEVIN O’FLAHERTY: Before we move on, and I’m going to ask you even though you don’t do this type of alternative financing just for a bullet point overview of what other types of alternative financing are out there, but before we move on to that, what else do people need to know about factoring, or is there anything else you want to share about that?
KIM BUKOVSKY: Yeah. Thanks, Kevin. A lot of people think you have to be in business a long time: You don’t. To factor your invoice, you just have to have completed work, your invoice has to be true and accurate. If you want to start your business last week and you want to factor, a lot of people ask me that. “Oh, I have to be in business two years.” That’s traditional bank financing.
KEVIN O’FLAHERTY: Because it’s not your credit that matters.
KIM BUKOVSKY: Right.
JIM WASZAK: It’s the customers’.
KIM BUKOVSKY: If your customer has not been in business a long time, they’re probably not approved for our program. Business to business. It only has your business. You have to do business to business, not business to consumer.
KEVIN O’FLAHERTY: Are there people out there that do business to consumer types of things?
KIM BUKOVSKY: Yeah.
KEVIN O’FLAHERTY: There are? Is that something that you can refer to? Or should people kind of find that out on their own.
KIM BUKOVSKY: I think they have to -- I don’t know. Because you’re collecting from a consumer. A lot of roofing companies, a lot of construction companies, a lot of those types of service industry do B to C, because they’re collecting from the end user. We want to deal with businesses, not people. People in business I should say.
KEVIN O’FLAHERTY: So what else? Anything else you want to share about factoring?
KIM BUKOVSKY: Um, no. I just think a lot of people don’t realize that’s an option for them. I’ve heard a lot lately that people are going into these banks, and these banks aren’t lending, and I don’t know. I think they’re offering so many alternative sources.
So again we’re just an option for the small business.
JIM WASZAK: Well, I think the mistake that small business people make, or the mistaken notion they operate under, is that a bank is a source of capital: It’s not. It’s a source of acuity.
KIM BUKOVSKY: Correct.
JIM WASZAK: So they’re only going to lend when there’s assets to support it.
KIM BUKOVSKY: Correct. The only asset that you need, or that we require, is the collateral is your receivables. If you’ve got a good sale, a good invoice, and you got a good customer, it’s a great option.
JIM WASZAK: So I guess the other lesson for the entrepreneur and a small business owner is to just keep pursuing a solution. You never know when you’re going to find one that you didn’t know existed.
KIM BUKOVSKY: Correct.
KEVIN O’FLAHERTY: Real quick and dirty, because I know this isn’t what you do, but what’s the brief overview of just the different flavors of other alternative financing.
KIM BUKOVSKY: If you’re a small business owner, and you need some working capital, there’s what’s cash advance. Emerging cash advances. They give loans based on your bank accounts. There’s microlending, a handful of these microlenders out there. There’s an Accion in Chicago. Tons of those microlending.
KEVIN O’FLAHERTY: So those lenders that’ll lend at maybe a higher rate for a small loan that you wouldn’t be able to get from a bank.
KIM BUKOVSKY: Right. And they’re lending. We don’t lend you money. We give you cash for receivables. Those lenders are giving you money, but then you have to pay them back. So factoring you never pay back. You never pay us back. We’re giving you the cash. We just don’t give you 100% of that.
KEVIN O’FLAHERTY: Sure.
KIM BUKOVSKY: So, I think it’s really neat. When I tell people they’re like “Oh…”
I said, “You’ll never ever pay me any money.” That’s when I think it clicks.
Like, “Oh, I guess I can go to the microlender. I guess I can go to these lending opportunities like the Kabbage.” I think you hear them on the radio, and they’re loans. So loans you have to pay back. With factoring you never have to pay it back.
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Kevin owns O’Flaherty Law, a general practice law firm with locations in Downers Grove, Elmhurst, and Naperville, Illinois. O'Flaherty Law's attorneys have expertise in many areas of law including but not limited to divorce and family law; civil litigation; estate planning; business and corporate representation; commercial and residential real estate law; elder services, probate and guardianship; immigration; bankruptcy law; and dui, traffic and criminal defense.
Jim owns Success Enhancement, Inc., which is geared toward helping you solve management problems in a way that is fun and engaging by using improv comedy techniques and role plays.
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