The Differences Between Invoice Factoring and Structured Settlement Payments
It’s hard to turn on the television these days without being bombarded with ads for “structured settlement” payments or “legal settlement” payments. You know the ones. “It’s YOUR money. Use it when YOU need it,” intones the distinguished white haired, deep-voiced executive.
Seeing one of those commercials for about the 500th time today made me reflect on the differences between structured settlement payments and accounts receivables factoring.
Both accelerate cash flow. But that’s pretty much where any similarity ends. Aside from cash flow acceleration, the two are very different animals.
Structured settlement payments target consumers. Let’s say a consumer has been awarded a settlement in a malpractice case, in the form of a structured payout over a period of years. The consumer assigns the rights to the structured settlement to a funding source, in exchange for an immediate lump sum. That lump sum is typically paid at a steep discount — meaning the consumer gets far less than the total amount — netting perhaps only 60% to 75%.
By contrast, factoring accounts receivables is a well-established funding mechanism for businesses. When you factor receivables, you will net far more for your receivables than the consumer does from selling a structured settlement. So it’s a much less expensive source of funding in that respect.
Also, a business person making an informed decision to factor receivables, and a consumer under the lure of immediate cash, bring two entirely different sets of knowledge and motivations to the table. Business owners make weighty financial decisions everyday and “run the numbers” routinely. Consumers may or may not be as well informed or equipped by experience to evaluate the ramifications of their decision.
One additional difference that I recently discovered is that structured settlement transfers are subject to laws in most states requiring judicial oversight and approval. This is an added protection for consumers. And it’s a big difference with accounts receivables factoring, which in most circumstances is not subject to any kind of court proceeding.
Businesses have the ability to plan and cover some or all of the cost of factoring, i.e., businesses often can raise prices going forward to cover factoring fees. Consumers receiving structured settlements do not have that ability. Whatever settlement they received — that’s it. Any costs of the structured settlement have to come out of their settlement amount. Consumers have no possibility of recouping the funding costs.
While I’m not here to trash payments on structured settlements, I do think it’s important to understand the significant differences between them and accounts receivables factoring.
