Factoring Case Studies
Below are some case studies of how some clients have used invoice factoring to solve critical business problems. This is to serve as a general guideline for companies looking into factoring and how factoring can be a fit for their specific situation. For client confidentiality we have altered the names of the company and products.
Case 1 - Energy Drink - Self Funded
Company A is a small business that sells a new energy drink called "Energy Factor". This new drink is well accepted at trade shows, gas stations, food marts, etc. However, Company A only has a limited operating budget of $10,000 and therefore has to be wise where it advertises, as it does not have the capital to hire a dedicated sales force to market the product all over the country. To compound the problem, Company A has just received an order from Wal-Mart for 20,000 cases of Energy Factor for a total sale of $30,000. While this may seem like a great opportunity for Company A, Wal-Mart's payment terms are Net 60 and Company A does not have the money to pay their bottling plant to produce the 20,000 cases (production cost is $12,000).
Does Company A risk losing the sale to Wal-Mart and therefore almost guarantee that they will never be able to sell to them again?
By factoring their invoices with KCM Factor, Company A can have immediate access to up to 90% of the value of the invoice that is presented to Wal-Mart for payment. KCM verifies the invoice with Wal-Mart's accounts payable department and then transfers the funds to Company A's account within 24 hours. Company A can now fill its order with Wal-Mart, pay its employees, pay its bottling company, and go out and try to sell more product to other customers.
Benefits of factoring:
Instead of losing the sale to a large customer like Wal-Mart because it did not have the capital to produce the quantity ordered, Company A was able to produce the order on time and get its foot in the door to a potentially larger customer base.
Company A did not have to wait at least 60 days to get paid by its customer which would have left the company crippled without operating capital.
Repeated sales to Wal-Mart now enables Company A to hire a sales team to market and sell the product throughout other territories.
Case 2 - Cleaning Company - Bank Financed
Company A is an established business that provides commercial cleaning services. Company A has been in business for 5 years and already has several cleaning contracts with different customers. They operate efficiently and are able to meet their weekly payroll and cover operating costs due to a credit line which they have with their primary bank. Company A has just bid on a county contract and has been awarded the contract. The County has asked for Net 30 day terms as part of the bidding process and pays invoices on an average of 45 days. They have approached their bank for a credit line increase to cover the additional payroll and supply costs but have been denied because the bank believes that they will be unable to pay the higher monthly payment on time.
How can Company A continue to grow their business and attract large customers like county governments if their bank will not approve additional funding so they can meet increases in manpower demands?
By factoring their invoices with KCM Factor, Company A can now use their invoices as a secondary funding source to cover the additional expenses created by their increase in business. Company A can continue to pay their bank credit line on time and use it in conjunction with factoring their receivables to create additional operating capital. KCM Factor verifies the invoices presented to the county government and advances up to 90% of their value within 24 hours to Company A. Company A can now hire additional employees and buy more cleaning supplies to handle the county work and does not have to worry about keeping their commitment to the county and losing the contract.
Benefits of factoring:
Instead of losing the opportunity to grow the business by bringing on larger, high profile clients like the county government, Company A can now fulfill its contract and continue to bid on additional large projects which will take the company to the next level.
Company A did not have to wait at least 45 days to get paid by its customer which would have left the company struggling to pay its employees who they rely on to clean the buildings included in the contract.
Due to funding based on the quality of their accounts receivables, Company A was not penalized by having an existing credit line with their bank, which is a criteria most lending institutions use.