Entrepreneur Turns to Factor for Crucial Funding

A technology and software developer headquartered in Deer Park, Illinois, led by a serial entrepreneur with a track record of building successful companies, developed an innovative monitoring device for the Canadian Government Healthcare System. The device enables patients newly-released from the hospital to communicate with a registered nurse and get advice via video and chat function.  This allows them not to have to go back to the hospital and be readmitted for minor issues that can be addressed remotely. The Illinois company was working with Toshiba and Motorola to manufacture parts, and with another company for assembly. But the Canadian government took 120 days to pay, and the company needed to pay Toshiba and Motorola for parts in a timely manner. They looked into factoring companies but most were unwilling to work with them for two reasons. The first reason was their multi-million dollar exposure with a 100 percent concentration debtor in the government; and second reason was the fact that the Canadian Health Ministry took so long to pay.High customer concentrations is when a company relies on one or very few customers that bring in the majority of their revenue.  This creates a large amount of risk that banks and most factoring companies do not want to take on.  Only the most experienced and diligent factoring companies will take on a customer such as this.  The company did find an experienced factoring company with the expertise and patience to work with government entities and high customer concentration. Yet, there were more challenges ahead.  The company already had two equity investor groups who had liens against company assets. The experienced factor negotiated with the investor groups to achieve a subordination on the receivables.   A subordination is when a 2nd lender, in this case the factor, asks the 1st lender, the investor group, if they will allow the business to take on an additional lender.   Subordination agreements are commonly done when leveraging accounts receivable and purchase orders. The accounts receivable or PO’s are assets that are used to secure a working capital line of credit.   The factor provided a $2 million factoring line of credit, and their very first invoice was for $1.4 million.  Their factor experts had to dive deep into the Canadian Health Ministry infrastructure to get the proper signoffs. Their diligence paid off when they received written verification from the Deputy Minister of Health, the top person in the department.The factoring line of credit and the factor's government experience sealed the deal for the entrepreneur. The developer now has the ability to pay their suppliers and fill the Canadian Health Ministry’s large orders. It also gave them the working capital they needed to grow the business.