A Guide to Starting a US Import Trade Business with Financing Options

Financing a US Based Import Company

Starting and Financing a US Import Trade Business is not an easy task. Here is a guide to getting started and to have financing in place from Paragon Financial, a 24-year old non-recourse factoring and import trade financing company.

Export and Import are not new terms. The business of trading (importing and exporting) has been going on for 10,000+ years. Trade had made it possible for the middleman and the pioneers in the export and import business to become rich and prosperous and create the Great Houses. Even today, when a business goes global, it leads to the generation of more wealth in a short span of time. Furthermore, when a company enters the global business or international trade market, it indicates the success of the business.

What are the main motives for Import Business?
Accessibility: As much as we like we cannot be self-sufficient. Neither at individual level nor at a country level. With Import/Export in place, all the countries make good and services accessible to their citizens even when they are not able to produce or make it within the country.

Prestige: There are many things that a country can produce but there would be few products that the country would specialize in. For example Scandinavian furniture, German beer, French perfume, Egyptian cotton. Being able to attain the specialty of a foreign country is a matter of reputation and prestige for many. Hence, some luxurious goods and services are imported for self-esteem.

Price: Another major factor why a country would allow imports is because it makes the commodity or service more price effective. Many times, it is cheaper to import from another country rather than trying to produce it within the country boundaries. Walmart has a large presence in China because of the billions of dollars of goods it imports from there to the US.

How do I get started?
One of the preliminary things you need to do is to get acquainted with U.S Customs and Border Protection (CBP) policies and procedures.  If you are planning to start an import/export business, you need to fill up CBP entry form and you may also need to obtain a license from local or state authorities to do business. The CBP website contains detailed and valuable information for new and experienced importers. Thorough knowledge of these policies and procedures would help you avoid any potential problem with clearance of your imported goods.

Once you are sure of all legalities, start by choosing a Business name. Setup a website and blog to make yourself visible on the global market at an online platform.

Then, choose a product that you want to import and find the right market. Get into details of everything. A thorough market research is a precondition to establishing a profitable venture. You should know who you want to cater to and who you want to depend on for providing the commodity. You can always ask the manufacturer to improve and enhance the products as per your customer base.

Decide on the volume you want to import and at what price.  Ascertain the commission you want to earn and the price you would be selling the product to your customers. Finalize on business dealing contracts.

Now you are ready to get rolling. Following is the Import trail:

  1. Collect the exporter’s quotation and negotiate if required.
  2. Open a letter of credit at your bank or financial institution.
  3. Confirm that the merchandise has been shipped.
  4. Obtain documents from the exporter.
  5. Verify merchandise through customs.
  6. Collect your merchandise.

What Import/Export Trade Challenges You Should be Prepared for?
Since under Import/Export trade, you are dealing with a foreign country or multiple foreign countries, you should be prepared for various challenges as the business cycle is comparatively long and complex. Let’s take a look at some of them:

Life would have been so much easier and simple if we could take people at their face value. Unfortunately, not all overseas companies that you want to Import from are what they seem. In an ideal situation, you could have a representative at an overseas location to supervise the sourcing of products. However, that’s not always possible. For this, you can take help from an International trade and sourcing expert.

Negotiation is not easy as you are dealing with a different culture altogether. Many times, there would be a language barrier as well. Also, there are many miscellaneous expenses you incur which get added to the value of the goods imported. It is possible that the cost of the product you are importing is very cheap from the country of origin. However, it may be expensive to import that to your country. Hence, an exhaustive planning and calculation are required to ensure that you are able to make profits.

Quality Control
International trade would require you to trust the supplier to provide required commodities at a pre-decided quality parameter. It is one thing to explain and settle down on your expectations and the other to actually get the same quality from the manufacturer. Hence, good quality control procedures need to be in place to ensure that what has been promised is what is actually delivered.

Getting the products from the country of origin to the destination country is no easy task. Means of transport is another important decision to be looked into. Also, it is much better to sell to your large US-based customers FOB China, Italy, Vietnam, etc. as they have expertise in moving goods in the international supply chain.

Not being well aware of the customs policies and fees may result in deep losses and unnecessary hurdles. If not properly guided, it can be a very time consuming and expensive affair to get your products cleared from the customs.

Financial hiccups
One of the most significant challenges is to get trade finance in the first place. Economic conditions are becoming highly uncertain and it is becoming difficult to get bank loans. Also taking a loan from a bank is a long and complex process. Whereas for smooth flow of business, it is imperative to have ready cash as and when required.

Currency Instability
Import and Export companies make and receive overseas payment and the exchange rate keeps changing. When you dealing with millions, this instability can significantly impact your financial planning. An unexpected change in the exchange rate can leave you in a desperate situation.  Also, the procedure of money transfer can be slow and costly. All this will result in your being unable to pay your suppliers and meeting your expenses.

Assistance is available
Though not all but some major potential problems can be overcome by taking help from a good financial institution.

Paragon Financial Group has a history of helping importers and distributors with trade funding for the past 24 years. Paragon offers cash flow solutions through cash against documents funding, invoice factoring, purchase order financing, AR management, credit protection and account receivables programs.

Let us look at Cash Against Documents (CAD) financing choice in detail:
As the name suggests that Cash Against Documents means an importer would pay for the purchases before receiving the actual products. They make payment on receiving documents. To ensure complete satisfaction to both exporter and importer, a third party is involved who accepts the title documents and shipping of the exported goods and only releases them to the importer when the payment is received.

The process of CAD transaction includes the following steps:
Exporter or seller prepares necessary shipping documents required by the country of origin (exporter) and the country of destination (importer). One of the document is called an Export Collection Form. This form or bill of exchange is forwarded to the financial institution.

Now an importer or buyer can inspect the goods without taking the title of ownership. Once the buyer is satisfied that the goods meet the quality promised and quantity is as agreed, they release the payment to the financial institution. Once the payment is received by the financial institution, they forward the payment to the exporter and the title of goods and paperwork to the importer.

Since both the parties (exporter and importer) benefit out of this arrangement of CAD transaction, mostly the cost of a fee charged by the financial institution is split between both the parties. International trade is a complex transaction. Hence, the small fee charged by the financial institution to safeguard both parties is well worth the expense.

In comparison to the banks, more working capital is available from a private company like Paragon Financial. Paragon is transaction driven compared to the banks focus on your balance sheet. Furthermore, many banks do not possess the experience and knowledge required to handle this type of international transaction. Paragon deals with import financing transactions daily and are well versed in the paperwork involved.

Another financial solution Paragon offers is Non-Recourse Invoice factoring. Here is what we do:

  1. You as an importer or distributor provide goods and services to your customers, followed by invoicing your clients.
  2. You send a copy of the invoice to Paragon
  3. Paragon releases immediate funds to you of up to 85% of the invoice total.
  4. Your clients make payments directly to Paragon and once the total has been paid, Paragon pays the remaining balance after deducting a small fee.

Why as an importer would you like to get immediate cash at a cost of minor fee?
Having access to immediate cash will help you meet payroll needs, pay your suppliers and take advantage of early payments discounts and concentrate on growing your business and clients. On the other hand, if you wait for the payment as per the traditional way, then you get confined to your normal cycle of business and are unable to grow your business and concentrate on new clients.

Benefits you enjoy on paying a minor fee to a factor for factoring your invoices:

  • Invoice factoring allows you get immediate cash without taking any loan.
  • Since you are not taking any loan you do not incur any debt or liability.
  • Loan free cash lets you be in full control of your business.
  • You can take advantage of Paragon’s experience in the business. If you are planning of doing business with a new client, let Paragon give you detailed information about the credit history and payment pattern of the prospective client. Paragon acts like an in-house credit department and saves you from entering a bad deal.
  • Paragon is very organized in its business. 24-7, you have access to your online reports. Paragon provides real-time reporting. You can know who is paying on time and you have pending invoices for a long time. We are skilled in making soft collection calls to your customers or applying pressure whenever required. However, every action is taken only after consulting with you first.
  • Unfortunately, there are factoring companies in the market which require you to factor all your invoices. Once you decide to factor your invoices, you get stuck in the arrangement. However, Paragon gives you flexibility. We completely respect your right to pick and choose the accounts you want to factor. There may be several reasons, you may not want to factor certain invoices.

What import businesses have Paragon Finance helped in the past? Since 1994, we at Paragon in the last 24 years have funded every product classification you can buy at Walmart. Here is just a small sample of the following types of US food imports:

  • Meats and meat products
  • Fish and shellfish
  • Dairy products
  • Nuts and nut production
  • Coffee, tea, and spices
  • Grains, grain products, and bakery foods
  • Vegetable oils, olive oil, and oilseeds
  • Cocoa products and chocolate
  • Sauces, essence oils, and other edibles
  • Wines, Spirits & Liquors

We specialize in handling high volume purchase orders and offering swift services. Invoice factoring also opens another area of financial assistance to you and that is called Vendor Guarantee.

Vendor Guarantee
Many times, your supplier or seller requires being paid in advance or a guarantee that they will get paid. This could be due to multiple reasons like you are new in the business, no strong credit history etc. An invoice factoring company can provide this guarantee on your behalf to the vendor.

Obviously, the pre-requisite is to factor your invoices. Remember, you can choose to avail invoice factoring services without the Vendor Guarantee option. However, you cannot avail Vendor Guarantee without factoring your invoices. Talk to your supplier about this arrangement. Many would happily agree to this arrangement as it gives them assurance of getting paid. The factoring company remits the funds to the supplier once your invoices are factored. Any remaining funds after paying off supplier goes to your company.

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How Payroll Financing Works for Commercial Cleaners

Payroll Financing for Commercial Cleaners

We all know that the banks do not provide a friendly credit environment to the commercial cleaning industry. If they offer any money, it usually isn’t enough. This often leads to an inability to grow your company due to a lack of funds. Well, there’s a type of financing out there that is greatly increasing in popularity in the janitorial industry. It’s called factoring. This type of financing concentrates on your customer’s ability to pay, not yours.

Factoring is the sale of your accounts receivable (invoices) to a funding source at a discount off the face value in return for immediate cash. The funding source is known as a factor.

The process typically works like this: Your cleaning company provide services and issue an invoice to your customer. Without factoring, you wait 30-60 days for payment. With factoring, the factor immediately purchases the invoice and advances an initial payment of approximately 80% of the invoiced amount. In most cases, you’ll have funds in your account within 24 hours. When your customer pays the invoice (payment is made directly to the factor), you’ll receive the remaining balance less the factor’s fee.

Factoring is a well-established form of business financing that produces immediate cash payments to a company at the time of shipment, delivery and invoicing a customer. In its basic form, factoring has been used by American business since Colonial times, and its origins go back even further, literally thousands of years to the early days of commerce.

American consumers take part in a common form of factoring every time they use a credit card. There are 1.4 billion credit cards in circulation, 2.6 each for every American cardholder. In 1970 the average balance on individual cards was $649, increasing in 1986 to $1,472, and today it is an astounding $16,061! Millions of times a day every business that offers customers charge privileges using credit cards is the direct beneficiary of factoring. American retail business depends on the factoring system, and without it, the national economy would be seriously handicapped.

In this familiar transaction, the issuing bank or card company is the factor-using the Visa, MasterCard or other system-advancing the seller of merchandise or service cash immediately after your purchase, long before you actually pay. Because the seller gets cash up front without having to wait for your payment, his money is not tied up in receivables. For the double privilege of making credit available to customers and getting immediate payment, the business is willing to pay a discount to the issuing bank or credit card company-typically two to four percent of the purchase price. Thus for ever $100 of merchandise you buy with a credit card, the seller gets $96 or $98 in immediate cash.

Factoring accomplishes the same for commercial or business-to-business transactions. When you extend credit to a customer, you are essentially becoming that customer’s part-time banker. For the period credit is extended to Customer Smith – 30 or 60 days – you become his lender, and he your borrower. For the length of time credit is extended you lose the value of that tied-up money because you can only anticipate payment. If Mr. Smith had paid cash, you could have invested that money immediately, earning interest on it rather than having to wait. When Smith pays late, your cost increases still further.

Since there is no “free lunch” in business, someone has to pay the costs of your extension of credit; either you pay by reduced profits, or your other customers are forced to pay higher prices. In a marginal company, excessive credit extension and late customer receivables can spell disaster.

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Agricultural Supply Chain Funding with PACA

Fast Funding for your Agricultural Company

As a part of being in the agriculture industry, you have worked hard to create, import, or distribute the perishable fruits and vegetables that keep American families healthy. As a backbone of American society, you deserve to have the confidence and comfort of being able to grow your business and take care of your family with consistently available cash in the bank.

At Paragon, we understand that when it comes to perishable goods, how difficult it can be to find a PACA lending source who understands and is willing to work with the complexity. With the Perishable Agricultural Commodities Act (PACA) rules, perishable goods have special lien rights and regulations. Understanding and dealing with the PACA rules and how it affects a financing package can be daunting for many lenders. The PACA trust puts most lenders at a disadvantage and creates an unwanted risk to them. Until suppliers of perishable agricultural commodities to a borrower are paid in full, a secured lender’s security interests are overruled by the sellers’ PACA claims.

At Paragon, our team knows how to navigate PACA rules and provide the agriculture industry successful funding packages.

What Are the Benefits of Agricultural Factoring?

  • We understand PACA Lending and Regulations
  • Cash in your hands in as little as 24 hours
  • Up to 90% advanced on Your Invoices
  • Payroll funding available
  • IRS issues and liens can often be a non-factor
  • Pre-approve your clients credit
  • 24 years servicing the agricultural industry
  • Credit protection against bankruptcy through Paragon’s Non-Recourse Factoring

What is PACA?

The Perishable Agricultural Commodities Act (PACA) are rules and regulations that help fresh and frozen fruits and vegetable sellers with vital protections to cover legal disputes as well as financial protections for the produce sellers. Protections include prioritizing payments to sellers if a grocery store files for bankruptcy and dispute resolution should one arise. There are requirements to gain these protections such as being licensed by the USDA.

PACA was specifically designed to help the produce industry protect themselves from middlemen and grocery chains. It has also opened opportunities for sellers to get safe funding to speed up their agriculture receivables collections and to get that important cash in the bank even faster.

The Agricultural Marketing Service is responsible for administering PACA and its related services to the produce industry.

What is Agriculture Factoring?

Agriculture factoring helps to keep market shelves filled with your produce – and more of it. Agriculture receivable factoring provides you with non-recourse funding on your open accounts receivables in record time, giving you the critical working capital immediate you need to run your business. Traditional banks often will often not loan you money, their loan approval process takes an exorbitant about of time or they simply won’t deal with PACA.

For the business owner who uses agricultural factoring from Paragon Financial, they receive fast, affordable funding releasing you from the uncertainty and worry of getting paid. You get the peace of mind that the cash flow will be there to keep your business running smooth. Paragon Financial can help by providing the cash on your accounts receivables produce sales, you can then provide even more high-quality produce to stores – and on that additional round of shipments, Paragon will still be there to get you funded and paid sooner.

Even in one-off cases of spot financing, Paragon Financial can help get you that bridge to cover your payroll funding or order financing cash flow to bridge you into the next sales and receivables cycle.

Let Paragon Financial help you maximize your business’s supply chain and annual sales by accelerating your collection period with its agricultural factoring offers.

Who Can Qualify for Agriculture Factoring?

  • Companies along the Supply Chain that Follow PACA Rules and have a USDA License
  • Startups, Turndowns, Bank Exiting or underperforming Banking Relationships
  • Personal Credit of Owner is not an issue; we look at your customer’s ability to pay
  • Businesses looking for Competitive Finance Rates
  • Fast Growing Companies with sales of $25,000-$3,000,000 per month
  • Paragon can move Quickly on New Client or High Growth Client Approvals

What is the Cost for Agriculture Financing?

Use our powerful invoice factoring calculator to get an idea of factoring rates. For an exact quote, fill out our fast, one-page secure application.

Want your working capital issues solved anywhere along the agriculture industry supply chain?

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What is Invoice Factoring without Recourse?

Invoice Factoring Without Recourse

What Is a Non-Recourse Factoring Agreement?

Thinking about invoice factoring without recourse for urgent cash flow or for working capital to grow your small business? Well, it may seem like there are a lot of factoring options out there for small business. Yet, all accounts receivable factoring options are not equal. Likewise, factoring companies (also known as, “factors”) are not all the same. Many factoring companies only offer factoring “with recourse.” More experienced and long-standing factoring companies offer factoring “without recourse.” 

Invoice factoring without recourse or non-recourse factoring is an agreement within a factoring contract where the factor’s client does not have to pay back the factoring company if an invoice is not specifically paid due to bankruptcy of the client’s customer (the Account Debtor) under an invoice with credit protection in place.

With a recourse arrangement, when purchased accounts are not collected by the factor for any reason within a relatively short time, the factor has recourse to charge back to the client the net value of an unpaid invoice. When your company enters into a non-recourse factoring agreement, however, your business is protected against extreme situations that prevent your customers from paying an invoice.

Whether a factor offers your company invoice factoring with recourse depends on:

  • your factor provides a credit protection program to offset when your customers are unable to pay an invoice due to an unlikely and extreme event, such as, bankruptcy,
  • you choose an established factor that is able to spread its risk among many of its clients,
  • the credit-worthiness of your customers, and
  • your company’s successful application for factoring financing.

A typical non-recourse factoring agreement offers the following basic features:

  • Your factor purchases your accounts receivable by paying an advance to your company for up to 90% of the value of each invoice included in your factoring agreement.
  • Your factor then promises to pay your company the difference due for the invoice (once your customer pays the factor for the full value of the invoice) minus factoring fees.
  • The difference due paid by your factor minus the factoring fees, is paid in a timely fashion to your company as each invoice is paid in full by your customer and according to terms in your factoring agreement including non-recourse assurances.

How Does AR Factoring Without Recourse Help Your Small Business?

First of all, factoring is the purchase of a company’s accounts receivable as opposed to a loan that creates debt on your business balance sheet. You speed up your cash flow by leveraging, or selling-off, the accounts receivable assets your company already has on its books. Factoring focuses on the creditworthiness of your customers, while bank loan departments would focus on your company’s financial history and cash flow. Accounts receivable funding is not a loan. So, your company ends up with less balance sheet debt.

A well-established factor providing AR factoring without recourse helps your small business by:

  • providing a master credit policy against the unlikely instance of your customer’s (the “account debtor”) bankruptcy,
  • outsourcing the responsibilities and operational costs of receivables collections and credit assessment, and
  • not only outsourcing your credit department to the factor, but also outsourcing the risk of accounts receivable!

Which Businesses Benefit from Invoice Factoring Without Recourse?

Many different lines of business benefit from invoice factoring, sometimes also referred to as discount factoring. Some people refer to invoice factoring as discount factoring when the factor purchasing an invoice from its client charges a factoring fee, and then the client thinks of the factoring fee as an amount discounted against the full value of the invoice otherwise to be paid by the client’s customer. Companies that do very well when taking advantage of invoice factoring without recourse include:

  • startups with an already established queue of backorders,
  • companies with accounts receivable consisting of credit-worthy customers,
  • businesses looking for competitive finance rates, and
  • fast growing companies with sales of $25,000 – $3,000,000 per month.

As well, companies that leverage invoice factoring without recourse also include industries and businesses facing:

  • bank turndowns,
  • bank exiting or underperforming banking relationships,
  • volatile cash flow,
  • funding is required to maintain substantial inventory or materials for production,
  • long-duration sales cycles,
  • slow paying customers, such as, large corporate buyers or government agencies,
  • seasonal sales,
  • unanticipated or urgent customer demand for products or services,
  • timely opportunities to expand into emerging markets,
  • innovations that present a chance to invest in new technology and equipment, or
  • options to expand offices, production workspace, or inventory warehousing.

What Is the Cost of Non-Recourse Factoring?

Are there differences in cost between recourse and non-recourse factoring? Many factors without a strong portfolio of clients will charge higher fees for non-recourse factoring than they will for recourse factoring in order to offset their costs for taking a bigger risk with non-recourse factoring. While a factoring company with a deep and solid portfolio provides the value of non-recourse without passing-on any additional cost to the client. Computing invoice factoring rates using an online Invoice Factoring Calculator provided by a factor that includes Credit Protection & AR Management in the factor’s accounts receivable financing gives you a view of the costs associated with non-recourse invoice factoring.

To use the calculator, you will need to be able to answer the following questions about your receivable accounts:

  • Your Estimated B2B & B2G Sales per Month
  • Your Current Total Accounts Receivable
  • Unpaid Invoices the Last 5 years
  • Your DSO, Days Sales Outstanding (How Long Customers Take to Pay You)

How Does a Small Business Apply for a Non-Recourse Factoring Line of Credit?

Another way of looking at invoice factoring is to look at how the typical non-recourse factoring agreement works with a credible established factoring company:

  • Your factor’s purchase of an invoice is actually the paying of an advance to your company for of up to 90% of each invoice of your accounts receivable included in the factoring agreement.
  • Since this purchase by advance scenario is leveraging your accounts receivable like an asset, you can think of it as using the assets on your company books to secure financing for ongoing business operations.
  • A maximum amount of funds available to be advanced will be determined, called your “initial factoring line;” that’s like a line of credit.
  • Your factor then promises to pay your company the difference due for the invoice once your customer pays the factor for the full value of the invoice, minus factoring fees according to terms in your factoring agreement including non-recourse assurances and credit protection.

Much like you would expect when applying for a typical secured line of credit, it makes sense for a small business to apply for non-recourse factoring financing by completing the following steps:

  • Complete a short application.
  • Supply your company’s most recent accounts receivable and accounts payable aging reports.
  • Present your articles of incorporation.
  • Provide a master customer list.
  • Supply a sample invoice.

Funding via non recourse invoice factoring has never been faster or more secure for your small business.

Apply Securely, call 888-400-5931 ext 1 or email us.

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Are Factoring Fees Tax Deductible?

Here’s Your “No Bull” Advice and “Big Picture” Rundown About Federal Tax Deductions and IRS Reporting for Domestic Factoring Financing

To file for tax deductions available from your factoring arrangement, be sure to turn to a reputable and experienced tax preparer. To better understand your factoring agreement, talk with your factoring company professional representative who knows their stuff. Your tax preparer will need to address a few questions and sort out reporting requirements for you. A few key questions to be handled are:

  1. Are factoring fees tax deductible?
  2. If your factoring agreement calls for invoice sale advance payments to incur interest charges until your customers pay invoices in full, are the interest charges tax deductible?
  3. How will you choose to deduct your factoring expenses on your tax return?
  4. How are your accounts receivable and the factoring of invoices going to be reported to the IRS?
  5. Last, but not least, your tax advisor will determine what, if any, state tax issues you may face. Here, we are only looking at issues about federal taxes for factoring arrangements.  So, be sure to get with a tax advisor regarding the applicability of state taxes for your situation. (For example, it may be relevant whether your state has a Gross Receipts Tax, GRT, in addition to or rather than a Corporate Income Tax, CIT.)

In addition to a few fundamental receivables factoring and tax-related topics in this article, there are many various bookkeeping and accounting principles that may or may not apply specifically to your business. This article is meant to provide understanding and guidance. Don’t rely on this article without having your tax and accounting experts advise you.

Easy Answers May, or May Not, Be All You Want to Know

The first question has an easy answer. Then again, it also has a more complex follow-up answer. The short answer is, yes, your factoring fees are tax deductible.

‘How’ to report the factoring fees on your return is more to look at later in this article. Simply put, how you will deduct your factoring fees on your return will depend on how you have been capturing the fees in your bookkeeping and reflecting them on company financial reports.

Similarly, tax reporting of factoring receivables depends on how the receivables are recorded in your accounting and company financial reports. We will look more closely at the tax liability of receivables factoring also later in this article.

If that’s all you want to know for now, then you’ve already got a handle on the basics. You will put your trust in the expertise of your bookkeeper, accountant, or tax preparer to choose your record-keeping methods and IRS reporting options.

Though if you’re interested, there is more to uncover that can help you better understand how factoring impacts your company financials and business tax liability. There are a few different choices that can be considered about how factoring fees and accounts receivable invoices can be reported on your business tax return. It may also be helpful to know which certain types of factoring agreements the IRS has been scrutinizing in recent years.

Familiarizing yourself with the tax issues of factoring is a good chance to dig deeper into understanding factoring overall. You will also gain more know-how about how your accountant is interpreting your factoring agreement to track revenue and expenses for your company financial reports.

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Good Advice Online is Tough to Find About Tax Preparation for Factoring 

Clear and specific information about tax issues for factoring agreements is hard to find on the web. We did extensive search engine hunting and also a deep dive at the Internal Revenue Service IRS.gov website. It is clear that nobody has been able to provide a straight-forward and thorough review of this topic before now.

There are a lot of simplistic answers across the Internet about invoice factoring. Yet before now, there has been no meaningful explanation for why and how factoring fees are tax deductible. Nor has there been before now a broader and deeper look at other receivables factoring big picture tax issues. To consider the total cost of ownership of your factoring arrangement, you want as many of the tax issues for invoice factoring laid out for you as simply as possible.

IRS Auditors are Targeting Certain Receivables Factoring Arrangements

It is important to note which kind of factoring agreements have been getting the most attention from the IRS. For at least ten years, the IRS has been especially focused on two types of factoring arrangements:

  • The first type of factoring arrangement receiving special attention from the IRS is where the “factor” (in other words, the factoring company) is located outside of the United States.
  • The other type of factoring arrangement being targeted by the IRS is when the factor turns out to be a subsidiary company of the parent company who received factoring financing.

In these two cases, the IRS is looking for attempts to avoid paying taxes with end-runs around showing the true value of a company’s accounts receivable.

You may notice mentioned the misuse of transfer pricing when discounting factored invoices in certain factoring arrangements. This activity being looked at by the IRS is particularly relevant when a factor is a subsidiary of its parent company domestically or internationally.

The IRS has also been looking closely at factoring agreements where fees appear to be far off from the usual rates in the marketplace and, in other cases, where the percentage of receivables written off as bad debts don’t seem to be a right fit for a company’s overall financial picture.

You can rest easy about whether your factoring agreement will attract an audit from the IRS knowing that your factoring company is U.S.-based and is obviously a corporate entity unaffiliated with your company.

Factoring Is Not a Loan, But What About That Interest?

One important thing to remember is that factoring is not a loan. Although factoring is used to obtain cash for your business and it is often referred to as “financing,” it is not a loan. When looking at financing options, you may come across loans that use a company’s accounts receivable as collateral. Don’t confuse that type of a loan with factoring.

What may also trip you up is that, even though factoring is not a loan, your factoring agreement may include an interest rate and terms for interest charges. So, what’s going on here? When an advance amount is paid to your business toward the discounted purchase price of an invoice, often interest will be accrued on the advance amount until the customer pays off the invoice in full to the factor. At which time, the factor will then deduct interest charges and any other agreed-upon charges and fees from the remaining (not advanced) amount of the discounted purchase of the invoice. Since interest on a debt is a common tax deduction, this issue may be relevant for your factoring arrangement.

For one thing, the potential tax deductibility of the interest on the advance depends on whether your factoring arrangement is considered recourse financing or non-recourse financing. Usually, factors purchase invoices from clients without recourse. In other words, using a non-recourse financing arrangement. This means that if a purchased account is not collected by the factor, due solely to the financial inability of the account debtor to pay, then the factor must still pay its client the agreed purchase price. Whereas in a recourse financing arrangement, if the factor is not paid according to specified terms, then the purchase price of an account is charged back to the client by the factor.

Whether the advance payment of the discounted purchase price of the invoice is considered debt is then determined by whether the factoring arrangement is recourse or non-recourse. If the advance is due back to the factor in the case that the customer does not pay the invoice (such as in recourse financing), then the advance is considered a debt. Whereas if the advance payment is not due back to the factor under most circumstances (such as in non-recourse financing), then the advance is not considered a debt because it will likely not be ever charged back to the client.

What matters is that, as a rule of thumb, interest is typically tax deductible only if the interest is on debt for which the borrower is clearly liable to the lender. Your tax advisor should advise you accordingly.

Factoring Your Receivables Means Accounting for a Few Differences in Bookkeeping and Reporting

Accountants and tax advisors will be the first to tell you that accounting rules for keeping your business books do not jive with IRS rules for reporting taxable income. So, what that means is book income can differ from taxable income. So, this is just a heads-up. When you’re reviewing your company’s expenses and income overall, there will be income and expenses on your tax return not included on your books and income and expenses on your books not included on your tax return. Crazy, right? Defer to the expertise of your tax preparer to use the proper IRS forms with your return to sort it out. So, for now, don’t sweat it and move on.

When it comes to your bookkeeping and financial reporting, factoring receivables can be straight-forward in some respects and yet also require specialized attention by your bookkeeper or accountant. An example of a simple truth is that the sale of a receivable to your factor, without recourse, merely lands the receivable on your balance sheet as a sale.

An example of bookkeeping complexity can include tracking what your business owes your factor. Your bookkeeper will maintain your ledger to present a liability on your balance sheet showing what you owe your factor at any given point in time. This liability should match the balance on your client statement. Then, at the end of each month, your client balance statement should be reconciled to your accounting system and your debtors should be reconciled to your debtors’ balance in your accounting system.

To fully understand what it means to have your invoices being factored is to remember that factoring is an asset-based financing option. As such, factoring is essentially an advance on the total value of a receivable. This is different from incurring bank financing interest as an expense that impacts your Cost of Goods Sold (COGS) as shown on your income statement.  The impact of factoring on your COGS is that factoring fees are applied against the advance from the factor and not against your product’s COGS.

Depending on your bookkeeper’s chosen accounting methods, another effect of factoring on your COGS may be to dilute the value of your inventory by the price discount of accounts/invoices sold to your factor.

Easy Tax Preparation Starts with Well-Prepared Bookkeeping and Financial Reports

Your accounting system specifically tailored for your business in combination with the factoring of receivables reflected in your company’s financial reports will guide your tax advisor’s tax reporting decisions. Regarding your factoring arrangement, your tax preparer should:

  • determine how to categorize the expense of your factoring fees,
  • present if factoring fees have been netted against items such as sales,
  • reconcile any factoring deductions that are book/tax differences,
  • report any cases of securitization of factored accounts receivable,
  • ensure that factoring reflected on company financial statements are presented uniformly on the tax return,
  • and ensure that all supporting documentation for information on the tax return is complete and on-file as of when the return is filed with the IRS.

Given recent IRS interest in auditing factoring agreements and the nuances of options for tracking and reporting your factoring arrangement, it’s important to turn to a trustworthy and long-standing factoring company. As well, you want to be confident in the advice of the professionals managing your company books and preparing your taxes.

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Nurse Staffing Agency Financing

Getting funding for your Nurse Staffing Agency

How do Nurse Staffing Agencies get Funding?

Even for the best-run nurse staffing agencies, payroll, rapid growth, and similar challenges are complicated issues. Clearly, running a nurse staffing company is no easy task. Try navigating through the above financial pressures with the complexity of scheduling, federal and state staffing requirements and working with staffing models such as patient acuity, budget-based, or nurse-patient ratio. Having readily available working capital on hand helps turn these challenges into a profitable venture.

One of the best ways to achieve the financial strength nurse staffing agencies demand is through invoice factoring. Factoring is a fast, safe and affordable way for the nursing staffing industry to meet their financial needs. Factoring loans give nurse staffing agencies the leverage to get payments from their clients immediately vs waiting 30 to 60 days or even more. Paragon Financial’s non-recourse invoice factoring programs provide AR management services along with comprehensive credit protection. This all means the life of running a nurse staffing company is a bit less complicated.

What Kind of Staff Nursing Companies Can be Funded?

Invoice factoring and payroll financing are flexible funding programs that are successful in a wide range of nurse staffing segments. This includes, but is not limited to:

  • General Nurse Practitioners (NP) and Family Nurse Practitioners (FNP)
  • Travel or Traveling Nurses
  • Registered Nurses (RN) and Licensed Practical Nurses (LPN)
  • Home Care Registered Nurses
  • Locum Tenens Physicians
  • Private Duty Nurses
  • Temporary Nurses
  • Certified Nurse Anesthetists (CRNA)
  • Clinical Nurse Specialists (CNS)
  • Pediatric Nurses
  • School Nurses
  • Government and Public Agency Nurses

What is an Example of Factoring Loan for a Nurse Staffing Agency?

Your nursing staffing agency has an outstanding invoice for $100,000 from an excellent quality customer. The only problem with your customer is their payment term of 45 days. You are a staffing service based company with good, creditworthy customer. This will earn you a 90% advance rate. Most of your expenses are payroll and it is important make sure you have working capital consistently flowing in to pay your temp nurses and payroll taxes, suta, futa and workman’s comp premiums.

Once the $100,000 invoice is verified, your nurse staffing company receives a same-day wire transfer of $90,000 into their bank from the factoring company.

You are charged a fee for the factor which varies depending on the length of time your customer takes to pay. For example, your fee is 1.5% for first 30 days an invoice is outstanding. In this case, your fee would be $1500. Your customer pays in full within 30 days and you are wired the remaining balance minus the $1500 fee. In this scenario, you received $98,500 out of the $100,000 original invoice and got 90% of it up front for a $1500 fee. There are other minimal fees such as wire transfers.

Why use Paragon Financial for your Nurse Staffing Funding Needs?

Paragon Financial is a factoring company with over two decades of experience funding the healthcare, nursing and staffing industries. We understand how to work with your specific needs, bringing nurse staffing agencies the cash flow they deserve to smoothly grow and manage their companies. Nurse staffing companies receive high advance rates along with the extra protection and benefits of non-recourse invoice factoring, accounts receivable management and credit protection.

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The Sad & Expensive Truth about Merchant Cash Advance (MCA) Loan Rates

Real Cost of MCA loans

1.3 rate factor? Notarized COJ? What do these terms even mean? And more importantly, what is the real cost to you of a Merchant Cash Advance or MCA Business Loan? MCA loans are seen as bad credit business loans and are typically 4 to 10 times more expensive than Invoice Factoring with none of the protection. The MCA ACH Loan Rule of Thumb says, whatever the MCA Rate Factor dollar amount is over the payback period, your net profit should be more. If not, at the end of that period you will be that much closer to bankruptcy. For example, if the ACH loan cost is $30k and you are paying it back in 3 months and your net profits are less than $30k in those 3 months – DON’T DO IT!

Also, a merchant cash advance loan is a one-time event. You get $100,000 once, and then you hemorrhage cash via daily ACH payments from your bank account until it is paid off. With Paragon, you are rewarded for growth. The more sales you generate, the more working capital you receive based on your increased client billings. We have clients who grew from $50,000 to $1,000,0000 in sales per month and Paragon was with them for their entire successful journey with unlimited working capital and credit protection.

The only plus of an expensive ACH loan is you get your money a few days faster than from a reliable invoice factoring company like Paragon. However, the hidden negatives are so onerous that they could kill your company.

Example Rates & Fees: MCA/ACH Loan vs Factoring

$100,000 from a Merchant Cash Advance lender

MCA Rate Factor 1.6 $160,000 $160,000 $160,000
1.5 $150,000 $150,000 $150,000
1.4 $140,000 $140,000 $140,000
1.3 $130,000 $130,000 $130,000
Months 3 months 6 months 9 months
# of Daily Payments 63 126 189
Daily Payment
1.6 $2,539 $1,269 $846
1.5 $2,380 $1,190 $793
1.4 $2,222 $1,111 $740
1.3 $2,063 $1,031 $687
MCA Loan APR! 1.6 423% 212% 142%
1.5 359% 181% 121%
1.4 294% 148% 99%
1.3 226% 114% 76%


Hypothetical $100,000 from Paragon Financial

Factoring $125,000/month with a 80% advance @ 1.5%/30 days

Monthly Factored Invoices $125,000
80% Advance $100,000
3 Months of Factoring Cost ($5,625)
versus 3 Month MCA Fees  ($40,000)
 Paragon Factoring Savings  $34,375!

Invoice Factoring from Paragon typically includes the additional value-added services of Credit Protection & AR Management, which means you receive even additional superior value versus any ACH/MCA/marketplace loan. You get so much more than just working capital from a good factoring company like Paragon.

Our invoice factoring calculator estimates both factoring’s benefits and costs to you and allows you to compare the cost of lenders who offer fewer services and versus the killer high rates of an MCA loan.

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The Sad & Expensive Truth about Merchant Cash Advance (MCA) Loan Rates

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How Factoring Companies Help Staffing Agencies

It is not uncommon for staffing agencies to experience working capital challenges, especially with weekly payroll. Invoices can take up to 90 days to be paid, all the while you still have to pay your staffing payroll on time. Whether you specialize in short and long-term temp work, or professional recruiting, there are going to be times when the amount of cash coming in is not able to cover what has to go out. These issues are relevant no matter what industry your staffing firm represents from janitorial to nursing, to security guards to teachers.

What Mistakes Do Staffing Agencies Make to Gain Working Capital?

It’s understandable to grow frustrated about the lack of cash and payroll funding for your temporary agency, especially when you are gazing at a stack of unpaid invoices. This could lead to you instilling practices that will eventually stunt your agency’s growth:

  • Adding excessive late fees to any client who pays you after 30 days
  • Making late payments on your operating costs
  • Not meeting payroll and paying your employees on time
  • Being overly aggressive in your collection techniques
  • Only providing staffing for clients who promise to pay invoices within 30 days

These strategies might be useful for increasing cash flow short-term but is not a good way to keep clients. Over time, they will look elsewhere for their staffing needs, and your staffing talent will find a firm that pays on time. Not paying your overhead costs on time will affect your credit, and the ability to get financing in the future. What solutions are there to meet your financial obligations?

How About a Business Loan for Working Capital?

One solution is to ask a bank or other lender for a working capital loan. This option takes up a good deal of your time, and you will have to provide the bank with stacks of paperwork. Your business credit is scrutinized, and you could be asked to present a business plan for the future of your staffing agency. Most likely, your company will be not be approved after going through a circus act to even be reviewed by the bank.

Even if you make it through the application process and get approved for the loan, you have to commit to making monthly payments to absolve the debt. This only exacerbates the issue of having to wait 60 days to get your hands on the cash from an unpaid invoice. A straight business loan is useful in some situations, but not helpful for the structure of a temp agency.

How Do Factoring Companies Help Staffing Agencies?

The complicated structure of staffing firms makes working with a factoring company ideal. They are payroll funding experts and are used to working in complex funding situations. Your largest assets lie in your staffing talent and the invoices that they have generated. Factoring companies are able to leverage these unpaid invoices as a type of collateral for securing the financing your agency needs to meet its weekly financial obligations.

A Factor gives you cash for unpaid invoices up front. This funding type is not a loan so you will not be subject to any form of interest on the money advanced to you. Non-recourse invoice factoring gives you the flexibility to get the cash you need immediately in the way you need it. You can choose which invoices to hand over to the lender, and on which you can wait to receive payment. The invoices signed over become the responsibility of the factoring company for management and collection. Factoring companies have deep experience working with a soft-touch and representing the interests of all parties involved. Staffing firms do not need to worry about a heavy-handed, uncaring ‘collection agency’ mentality. If you have a non-recourse contract, then even if the client does not pay, in many cases you are not required to pay the factoring company back.

Is There a Downside to Factoring for the Staffing Agency?

A factoring company will research the credit history of your clients before accepting an invoice, especially if they are offering a non-recourse solution. This could lead to them declining certain customers, or charging you a higher fee for taking their invoices. The flip side to this is that the factoring company can help you determine the creditworthiness of your business clients, and might even make recommendations to you for who to work within the future.

A staffing agency is much easier to manage once you resolve the cash flow issue. Without having to worry about when your clients will pay, and how you will meet weekly payroll. You can devote more time towards recruiting qualified talent, keeping up new industry regulations and pitching selling the perfect talent to new customers.

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What Does Cash Against Documents Mean?

Who Benefits From Cash Against Documents (CAD) Transactions?

International trade can be tricky business on both sides of the border. Straight credit is ideal but usually impossible to obtain when trying to purchase goods from an overseas exporter. Cash Against Documents (CAD) financing is the solution that helps ensure that exporters get their money on time while importers get the goods needed for their business.

What does Cash Against Documents Mean?

Simply put, CAD financing is a method in which an importer pays for goods before receiving them. To ensure that both the parties are satisfied with the transaction, a third party accepts the shipping and title documents for the exported goods. These are not released to the buyer – or importer – until the payment is received. This situation is similar to real estate transactions, where an uninterested party holds money in escrow until the transfer of the home’s title is complete.

There is a benefit of CAD financing for both sides. The exporter is guaranteed the payment for the goods shipped, and the importer can ensure that they receive precisely the goods they paid for. This method eliminates the headache of having to try and resolve business transaction issues across borders, once that transaction is complete.

Comparing Cash Documents vs Letters of Credit

Letters of Credit are another financing method used to help facilitate international trade deals. Like with CAD financing, letters of credit benefit the exporter who is unwilling to offer open trade credit. One reason for this is because they’re unfamiliar with the importer, or that the buyer does not have a credible credit history.

The actual letter of credit is a formal letter provided by the importer’s bank, promising their financial support to the buyer and this gives the exporter the right to demand that the bank will pay for the shipment if the buyer does not pay. This can be a one-time purchase, or the buyer could establish a line of credit with the financial provider that allows them to make regular purchases from the same exporter.

The seller gets the most advantage from letters of credit, as their payment is virtually guaranteed unless there is a severe breach of the agreement they have made with the importer. For the buyer, this method affects their line of credit and credit score, potentially interfering with their ability to deal with other vendors or take out business loans to increase their productivity. For some who do not have a stellar credit score, the bank may even insist on a cash deposit to secure the amount listed on the letter of credit.

What are the Cash Against Documents Terms?

The terms and conditions for a successful CAD transaction are straightforward. The documents for the shipment are prepared by the exporter once the buyer places the order. Those documents are then sent to the financial institution that is facilitating the transaction and held until the shipment arrives and the buyer makes the payment of the goods. Once payment is received, the documents are given to the importer, while the exporter receives the funds.

Even though a third party is holding the shipping documents, the exporter retains ownership of the goods until the funds are transferred. The importer cannot take ownership of the property in the shipment until they are given the title and shipping documents.

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What is the Cash Against Documents Process?

The exporter or seller typically initiates the CAD transaction. Once the order from the international buyer is accepted, they will prepare the necessary shipping docs required by the country of origin and country of destination. A standard form that is included in these documents is an Export Collection Form. This Export Collection Form, a bill of exchange, and other shipping documents are forwarded straight to the financial institution that is used by the exporter.

Once the documents are sent, they are held with the provision that they cannot be released to the importer until the designated payment is made to the financial institution. The transaction is not complete, and the seller retains ownership of the entire shipment until the financial institution receives the payment.

What makes this form of international financing advantageous to the buyer is that they can inspect the goods before transferring the funds to the financial institution. This protects them by ensuring that the goods are of the quality promised and in the quantity that they had requested.

After approving the shipment, the buyer pays the financial institution the pre-arranged amount for the consignment. Once the payment is received, it is forwarded to the exporter while the importer receives all of the shipping paperwork and title to the goods.

Who Pays For a CAD Transaction?

The financial institution that helps to facilitate this type of transaction charges a small fee for the service. Since both parties benefit from a CAD transaction, it is not uncommon to see them split the cost. If not, the party responsible for the fee as per the original agreement is the one who pays the fee. Because of the complexities involved in international trade, and the protection, that CAD transactions provide for both sides of the transaction, the cost paid to the financial institution who acts as the intermediary is well worth the expense.

Are There Any Risks in a CAD Transaction?

Although a CAD transaction does eliminate most of the risk involved in international trade for both parties, it is more advantageous for the importer. Especially when compared to letters of credit. A CAD transaction is less expensive and does not have any effect on the importer’s available credit. The seller still assumes some risk in that the buyer could refuse the delivery. In this event, the exporter would then have to absorb the additional cost of having the goods shipped back to them.

What to Look For in a CAD Transaction Funding Company

While some banks do provide CAD services, they may charge higher fees than a private company. Plus, they may not have the experience and knowledge required to handle this type of international transaction. These are complex transactions that require a level of expertise that many banks simply do not have. A funding company like WIP deals with this type of transaction daily and is better equipped to handle the intricate paperwork involved. Plus, they have gained experience in international import and export that will prove invaluable in ensuring successful CAD transactions.

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What is Merchant Cash Advance Consolidation?

Is a Merchant Cash Advance Consolidation the Answer to Your Business Cash Flow Issues?

It starts with a small merchant cash advance, which leads to another and then another until before you realize it, all of your business credit card sales are going towards paying off these debts. This practice of stacking merchant cash advance loans – or ACH – can quickly put your business into a downward spiral. One solution to help you get out of this cycle of business debt is a merchant cash advance consolidation.

What is a Merchant Cash Advance?

A business in need of quick working capital might look at a merchant cash advance for a cash-flow solution. So long as you have a merchant account and accept credit card payments, you could qualify for this type of small business cash advance. The merchant will loan you the money you need, and then accept repayments towards that loan through your credit card sales, virtually guaranteeing that you do not default. Of course, there will be interest and other fees deducted as well, but all of this will be bundled together into your payment plan.

Some businesses in dire need of working capital may commit to more than one of these types of business cash advance loans. This practice is known as stacking, and can cause the business to have to make daily repayments that they really cannot afford. In essence, the inflow of money can come to a near standstill if the business is one that relies heavily on credit card revenue to survive.

The Benefit of Merchant Cash Advance Consolidation

Merchant lenders like this type of business cash advance because the repayment is practically guaranteed through the business’ sales. If you were to consolidate these debts into one, the lender is still going to get their money back (and the fees they charged you) but the terms will be adjusted so that you are still able to collect on your daily sales receipts and keep a flow of cash running to your business.

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What is a Business Debt Consolidation Loan?

A debt consolidation loan for a business is not much different from one used for personal financial difficulties. You apply for a specialized lending product that details the extent of your business debt. Once approved for the loan, the new lender will pay off the existing merchant cash advance debts, essentially leaving you with only one payment to make, where before you had multiple. In most cases, even after interest rates and other fees are calculated, you will have more cash left over each month to work with. Moreover, when looked at over the long term, you will find that by consolidating those merchant cash advances, you have saved your business thousands of dollars.

The terms of a merchant cash advance include deducting a certain percentage of your money every day from your credit card sales. This can put you in a position of not earning enough to keep up with your expenses, especially once you have more than one of these types of cash advance. With a straightforward merchant cash advance consolidation, terms can be chosen that will still allow your business to move forward with enough working capital.

How Would Your Business Qualify for a Merchant Cash Advance Consolidation?

A reputable business lender would look at your business credit score, but they will also be interested in the amount of revenue your business is making, and how the merchant cash advances are adversely affecting your cash flow. They will then try and work with you to construct a repayment plan that you can meet easily without hurting your sales. If you are able to show that your business will still be sustainable with a merchant cash advance consolidation loan, then there is a good chance that you and your business can qualify for one.

If you find that you are continually in debt after having started on a cycle of merchant cash advances, it could be that you are overextended in credit, or that your business structure cannot withstand the loss of sales receipts that are common with this type of product.

In order to avoid losing your business altogether, meet with an alternative business loan provider like Paragon Financial to see what your options are and what types of loans you and your business could qualify for.

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