Factoring Blog - For Small Businesses

I have been keenly observing a trend in today’s society toward alternative forms of financing called ”cash flow” financing.

Consumers and business owners alike now have a wide variety of ways to turn a future payment into cash – today.  

People and businesses can “sell” or “assign” rights to a payment we expect to receive in the future, to get money NOW.  In effect we are getting accelerated cash flow. 

Many of these methods have been around in one form or another for decades, even centuries.  What’s different today is how these methods are going mainstream.  

Ads for structured settlement payments are plastered all over television.  Payday loan companies seem to have storefronts tucked away in every shopping plaza. 

As I’ve said before, I’m not encouraging the consumer cash flow financing vehicles.  I think there’s potential for misuse among some consumers — especially those who live paycheck to paycheck and who can least afford it.  If a friend or relative asked me whether they should get a payday advance or sell their lawsuit settlement or life insurance annuity, I’d be hard pressed to recommend it, except as a last resort.

Business factoring, however, is in a totally different category.  Smart companies use it for strategic competitive advantage.  Instead of being a short-term fix, some companies use it as a strategic self-funding mechanism (since it is based on leveraging customer receipts the company has already generated, not debt that they will have to find the revenues to pay back).  

But I’ve wanted to comment on this trend toward our ”get your money now” society because it is becoming so prevalent.  It’s quite the social change underway. 

Ultimately I think this trend is good for the factoring industry.  It means your decision to factor your receivables will be considered standard operating procedure by clients.  As the idea of accelerating cash flow becomes mainstream – and is done by Joe down the street or your uncle — factoring receivables will be considered as routine as pulling out a credit card (which at one time was considered an unusual thing).  

Bank loans and factoring services differ in many ways.  One of the key differences is whose credit-worthiness is at issue.

If you go to the bank to get a loan, the bank is making a decision based on your creditworthiness and your debt ratio.  But in factoring, you and your company are not really the issue. Rather, the organization that owes you the receivable will be the primary focus of the factor’s review.

Wikipedia actually has a good discussion of the key differences between a bank loan and factoring receivables:

Factors make funds available, even when banks would not do so, because factors focus first on the credit worthiness of the debtor, the party who is obligated to pay the invoices for goods or services delivered by the seller. In contrast, the fundamental emphasis in a bank lending relationship is on the creditworthiness of the small firm, not that of its customers.

Sometimes you just don’t want to have to deal with a bank. Too cumbersome, too slow, too many questions you’d rather not have to answer. Factoring can be a godsend because your company is not forced under a microscope in the same way that it would be with a bank loan application.

About a month ago I wrote about the economic outlook in the U.S. as “cautiously and tepidly optimistic.”  About the best you could say was that economists were avoiding predicting recession — so I guess you could call the outlook slightly positive as of early December 2007. 

Here we are a month later.  Is the news any different? 

The short answer: it’s hard to tell.  When you try to sort through the complex financial issues and the obfuscating language that most economists and financial commentators use, you find certain common themes.  First, there are the lingering effects of the housing market bubble.  According to an article originally published at Entrepreneur.com:

Don’t look for housing to return to prosperity before midyear, if even then. “There’s not going to be a real estate bounce-back,” says Gerald Celente, director of Trends Research Institute, a futurist study group.

That same article predicts that oil and gasoline prices will continue to rise (but you probably already noticed that from the gas pumps). And competition for good employees (and thus the need to pay higher staffing costs) will continue to rise, too.

So, the news is not so good from the sources cited in that article.

However, the latest NFIB Economic Trends report says, in effect, “hold on there, things aren’t that bad.” It paints a different picture, suggesting that there’s a big difference between Wall Street and Main Street, and that the issues Wall Street focuses on are not affecting America’s small businesses in the same way.

The Discover Small Business Watch for December 2007 tends to confirm the NFIB outlook report, suggesting that small business owners feel relatively optimistic.  However, that might change as the year end retail results are tabulated and the effects felt, says Sastry Rachakonda, a Discover executive:

“The mood remains cautious as fewer small business owners feel like economic conditions for their businesses are getting better. The mood could change either way depending on holiday receipts.”

So what are we are business owners to think?  Should we invest and expand?  Should we pull back and watch expenses? 

Well, no matter how you look at it, no one is suggesting it’s the wild wild west and that you should go full guns blazing into expansion mode.

On the other hand, it’s important to sort out the difference between what you hear Wall Street saying and what the conditions are like for main street businesses.  Wall Street doesn’t have the same interests as Main Street.

Lots of sites are making New Year’s Resolutions, lists of trends for 2008, and Top Whatever lists.  Matt McGee at Small Business SEM rounds up a huge list of them for us. 

While they tend to be heavy on the Web issues, you’re bound to get clued in to some very useful information. 

Want to know where the money will be in 2008?  Want to know how to get more customers from search engines in 2008?  If you are looking for the next trends for keeping ahead of the competition or for forecasting customer demands in your business, this is one list you need to check out. 

Read:  Big List of 2008 Prediction & Resolution Posts.