Modelling Question
I've been given a pretty vague task to put together an illustrative model for a private company that factors A/R as my team would like to present this as a potential investment opportunity to our clients as a part of a tech pitch deck.
Basically the company automates factoring A/R and takes a small % fee off clients that it pays, and then receives the full amount from their client's original customers.
Can anyone help me think through how to put this together? Don't have particularly good numbers to work with but just need to understand the big drivers of the business (how to model the top-line for a business that automates factoring A/R, big expense drivers - i.e. probably mainly salary, etc., how things flow through FS)
Thanks!
I'll take a stab if no one else will. I've only looked at a few of these companies so will defer to others who have more experience.
Option 1: Quick and Dirty
Look at the top line as a function of net funds employed ("NFE") and net yields. These businesses are advancing funds against invoices. As you noted, the company will charge a fee for factoring that it collects when the invoice is actually paid. The business should be able to tell you how much it has advanced, and then how much the fees translate to on an annualized basis (net of charge offs i.e. account debtor defaults). You can stratify this data in any manner that you think makes sense (geographies, account debtor industry, account type, etc.) to have more meaningful net yields. The rest of the PnL pretty much follows like any other company. Among other things, the weakness with this approach is that "net yield" isn't really something you see in the wild, and your model will struggle to tell you what happens if charge offs go up by 5%.
Option 2: Schedule Method
You could also build a schedule where you're modeling each month (or quarter) of invoice origination. With this method, you can get from the company (i) when invoices typically repay, (ii) what the company earns on a gross basis, and (iii) what chargeoffs look like at the invoice level. This should give you enough to model cashflows and returns at the "invoice level", however, the nuance is that there's typically a waterfall structure with respect to invoice repayment. Specifically, as you'd expect, if a customer factors an invoice, but the account debtor doesn't pay, the customer is the one who suffers the first loss. So if you have an invoice of $100, but you advance 85% of that, (ignoring fees) the customer is losing from that first $0-15. After that, the factor can look to repayment from existing or future invoices, the actual customer, or insurance. The point is: your returns won't be smooth as a function of chargeoffs. This method would capture that as well as the general timing of cash flows. The expenses would look similar in both modeling scenarios.
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