Fashion Contracts 101: Part 3 of 3
Fashion Contracts 101: Part 3 of 3
When Looking For Money, Don’t Discount This “Factor”
This last part of Fashion Contracts 101 covers Factoring Agreements. We know what you’re thinking, “Finally!” Well, you can put that sarcasm on hold, because those of you looking to grow a business need money. And what does factoring come down to? You guessed it–personality…just kidding, it’s money. In this edition, we introduce factor extraordinaire and close friend of TFLG, Jeff Sesko. Jeff offers his insights on the factoring process and how you can make yourself a better candidate.
Jeff, please introduce yourself and your company to our readers?
My name is Jeffrey Sesko and I work for Milberg Factors, Inc. It is one of the largest factoring and commercial finance companies in the United States, providing clients with factoring services, working capital financing, accounts receivable management, acquisition and debtor-in-possession financing. Milberg also manages loans and provides collateral management services to major commercial banks.
So, what specifically is a factor and how is it different from a regular bank?
Financing new opportunities often requires liquidity beyond the fixed formulas and capital ratios that traditional banks rely upon. Through factoring, Milberg Factors has helped companies to solve cash flow issues and provide timely financing for growth.
Collection Factoring effectively outsources all of your company’s credit and collection activities providing credit protection against approved customers who are financially unable to pay. Milberg Factors office handles all collection activities, applies all cash receipts and processes all bookkeeping functions. The customers send payments to a dedicated lockbox and Milberg Factors remits the payments received to our clients. Clients are able to monitor the results of Milberg Factors daily collection activities via our secure online state of the art technology platform.
Advance Factoring enables clients to turn accounts receivable into cash-on-hand with secured working capital loans. Milberg Factors working capital loans can be guaranteed by accounts receivable, inventory or other assets such as real estate, equipment and intellectual property. Advance rates are determined based on analysis of appropriate metrics.
When is the right time to go to a factor?
Factoring can be used by companies of all statures, from small privately-owned companies to large multinational corporations. Even though most companies that use factoring tend to be privately-held and have annual sales between $1 million and $200 million, factoring can be provided to any company that invoices or extends credit to their customers for services rendered or products delivered.
What is the appropriate rate to be charged by a factor, i.e. is there an industry standard commission percentage?
Typically, there are two costs associated with factoring: the factors commission and, if applicable, the interest charged on loans taken against receivables. The factoring commission is quoted as a percentage of factored volume and is based on analyzing three variables: (1) Amount of annual factored sales volume we anticipate receiving, (2) Credit quality of those customers our clients are shipping to, (3) Average size of each individual invoice. We charge a negotiated interest rate on money lent against receivables prior to collection. This is payable from the time the money is borrowed until the customer pays, which acts as repayment of the loan. The effective interest rate is calculated daily on the funds drawn.
If you are an apparel company, what are some things you should be weary about when choosing a factor?
It would be imprudent not to interview at least two or three different factoring companies in an effort to find one that satisfies the needs of your company. Some important attributes to consider when selecting a viable factoring company are the company’s experience in the industry , customer/support services, technology platforms available to clients (i.e., online reports: Accounts Receivable Agings, Credit Approvals, Customer Payments, Loan Status, etc.) and their willingness to provide references from their existing Clientele. Since choosing an appropriate factoring relationship is vitally important to the growth of any business, conducting proper due diligence is mandatory in eliminating the bottom tier factoring operations.
Can you talk about a few success stories of clients that you represent?
As a privately held company we take an entrepreneurial approach and are extremely relationship driven. Decisions are made promptly, without bureaucracy, and clients have access to key decision makers. Due to the fact that we have very thin layers of corporate hierarchy, we were able to underwrite, negotiate and close on providing both Accounts Receivable and Inventory facilities for a $50MM apparel company. From initiation to activation, the entire process took us a mere ten business days. Our expeditious turnaround allowed us to win the account, especially when the banking competitor quoted at least a two-month turnaround time for their underwriting process.
How can readers get in touch with you?
If anyone has follow up questions or requires additional clarification, please don’t hesitate to give me a call at (818) 649-8662, or send me an email at firstname.lastname@example.org. I’ll be very happy to assist in any way I can, because I know how important it is to obtain Credit Protection and Working Capital Finance to facilitate a company’s growth.
Factoring Agreement: Some terms to be conscious of when reading a Factoring Agreement are: Sales and Assignment, Credit and Approval, Client Risk Receivables, Returned Merchandise/Disputes and Chargebacks, Representations, Warranties & Covenants, Commissions, Purchase Price, Interest Rate, Advances & Reserves, Statement of Account and Expenses, Payments, Security Interest & Financing Statements, Books and Records & Financial Statements, Term, and Governing Laws/Jury Trial Waiver/Jurisdiction/Venue/and Miscellaneous Provisions.
Contact TFLG If you need any assistance drafting, reviewing, and negotiating your fashion contracts. Feel free to fill out the firm’s client intake questionnaire in the Contact section on the website.