Q&A: Growing Your Business With Accounts Receivable Financing

The recession has caused many banks to reduce or cut credit for businesses, making it difficult for many manufacturers to obtain operational funds. Some companies are turning to accounts receivable financing to obtain these needed funds and grow their businesses.

The recession has caused many banks to reduce or cut credit for businesses, making it difficult for many manufacturers to obtain operational funds. Some companies are turning to accounts receivable financing to obtain these needed funds and grow their businesses. Food Manufacturing spoke with Gene Knapp of Coface Credit Management North America, Inc. about this service and how it can benefit manufacturers.

Q: What is accounts receivable financing, and how does it work?

A: Accounts receivable financing, also known as factoring, is a financial transaction in which a business transfers its accounts receivables at a small discount to a third party (a factor) who in turn secures payment from the creditor. According to the Commercial Finance Association, the estimated U.S. factoring volume in 2009 was $116 billion in 2009. (2010 figures are not available yet.)

How does it work? Let’s suppose your company cans tuna fish. You have just shipped $40,000 worth of private label tuna fish to a supermarket chain. Instead of waiting 90 or 120 days for payment, you transfer the receivable to a factor, collect the cash overnight and get on with the next piece of business. It’s up to the factor to collect from the supermarket chain. Factors can finance a single transaction or all of a company’s transactions.

Q: What are the benefits of accounts receivable financing for food manufacturers?

A:Most food manufacturers who use accounts receivable financing say the most immediate benefit is speed and simplicity. Even under the best of circumstances, banks can take weeks, sometimes months to approve (or disapprove) a short-term loan. Factors can provide funds overnight.

Moreover, once they start using accounts receivable financing, food manufacturers discover other benefits:

  • Cost savings: Companies that adopt an accounts receivable financing regimen can redeploy their collections department into sales or customer service since collections is the factor’s responsibility.
  • Fiscal discipline: Many food manufacturers have had the same customers for a long time. Unfortunately, many of these customers like to play on those long relationships by dragging out payments. With accounts receivables financing, problem accounts become the factor’s problem.  
  • Reduced credit risk: Some of the larger factors maintain credit histories on hundreds of thousands of companies. They can advise you on the creditworthiness of new customers or warn you of problems existing customers may be having. 
  • Likeminded entrepreneurial spirit: Banks are backward looking. They base their credit decisions on your company’s past. Factors are forward looking. They base their decisions on your company’s future. Their interests are aligned with your company’s interests. 
  • Focus on growth: Instead of chasing after creditors or negotiating endlessly with bankers, you can concentrate on what matters – growing the business.

Q: What are the steps a food manufacturer should take when considering accounts receivable financing?

A: First, ask your accountant to provide the names of several factors and set up some appointments. In the meantime, you should also ask your accountant to prepare two years worth of financial statements and an accounts receivable aging list naming customers, the amount they owe and for how long. The factors will use this information to consider your company’s mix of customers, arrive at typical invoice sizes, determine average amounts outstanding, identify problem accounts and set rates.

You should also give some thought of where you want your company to be in one year, five years and 10 years. Do you want to expand into a new direction?  Or, maybe now is the time to buy out your competition? What about exporting? Have some concrete plans in mind because accounts receivable financing is a strategy that can generate aggressive growth.

Q: Do you see accounts receivable financing becoming common practice in the future, or will traditional financing methods return to popularity as the banks recover?

A: Banks have already recovered. Unfortunately, they are not sharing their taxpayer-supported prosperity with the rest of the business community. Worse still, experts agree that bank credit will remain tight for the foreseeable future. 

Indeed, most of the companies that survived the recession did it no thanks to their banks. There are still tough times ahead. So when it comes to operating funds, businesses will need allies, not adversaries.

For example, with markets saturated and contracting here in the U.S., American companies need to export. But banks typically refuse to lend against assets that are destined for foreign markets. Some factors, on the other hand, are willing to finance exports while providing a level of credit protection as well.

And while banks continue to reduce their offerings, companies that provide accounts receivables financing continue to innovate. For example, some factors have introduced some very cost-competitive products designed especially for larger companies with stable client lists and strong balance sheets.

Accounts receivable financing is fast, flexible, cost-competitive and here to stay. 

Gene Knapp is Vice President – Commercial at Coface Credit Management North America, Inc., the receivables financing arm of Coface in the United States. Coface is a global provider of trade receivables management and protection services, with operations in 67 countries and a client base of 130,000 companies. Gene has over 25 years experience in all levels of accounts receivable finance. At Coface since 2007, Gene helped the company develop and grow its factoring businesses in the U.S. and Canada. Gene earned a BA degree in Political Science and History from Brooklyn College. Coface Credit Management North America, Inc. is based in New York City.


Interview By Lindsey Coblentz, Associate Editor