Factoring Blog - For Small Businesses

I ran into this Q&A article outlining 7 points about factoring. One of the best parts of the article is this point outlining a common misconception:

“The biggest misconception is that people believe factors are a lender of last resort but that’s not true because clients seeking out factoring are often in the beginning stages of growth. At first glance, factoring appears to be expensive but does a lot more; in essence, factoring replaces the accounts receivable and credit department. For example, if a trucking company is doing $600,000 a year in sales, a factor may charge 5 percent (or $30,000) per year for financing. In addition to the financing, the factor will do credit checking, ledgering and all the collection work, thus saving the company the salary of an employee hired to handle the same tasks.”

When Tom Nort (CEO of Facteon) was interviewed on my radio program several months ago, one of his points had to do with the extra services that a factor can provide to a small business. The factor essentially can become your outsourced accounts receivable department. The factor brings added value to your business operations, making your business more efficient.

That’s something that a bank lender doesn’t offer.

And just think of the difference in attitude that presupposes. With a factoring company, they are on your side and working for you.  Banks, on the other hand, aren’t actively in a position to help you with collecting your accounts receivable.

Following up on my earlier post about bank credit tightening, there’s a report in the Washington Business Journal saying that asset-based lenders and factoring companies are seeing a surge in business right now. The article attributes it to the state of the economy and in particular, the state of the banking industry, with its tightening of credit.

Factoring and asset-based lending is thriving in this environment, it says. It also goes on to note these statistics:

“A survey published by the Commercial Finance Association July 8 found that the ABL industry in the U.S. grew 11 percent in 2007 to $545 billion in outstanding loans. The industry has grown 63 percent since 2003, when it boasted $334 billion in loans outstanding. Factoring volume grew 6.5 percent to $135 billion in 2007.”

Notice the statement at the end of that quote, about the growth in factoring.

This report from Reuters says that bank loans are tightening up for small businesses in the United States. Quoting from the article:

“As losses mount at American banks and the pain of the credit crisis spreads from housing and finance to the broader economy, many small companies complain it is increasingly difficult to obtain loans. * * *

‘In recent weeks we’ve seen banks becoming more cautious and the pace of lending has slowed considerably,’ said Weldon Gibson, a consultant at the Lamar University Small Business Development Center in Texas. ‘They are demanding higher credit scores and want more collateral before lending.’”

With the banks having a rough time, some tightening of credit would seem inevitable. But as the article also points out, not everyone agrees. The National Federation of Independent Businesses (NFIB) says small business owners are not reporting any problems getting credit, in its most recent Small Business Economic Trends report:

“For the 10th straight month since the Federal Reserve declared the existence of a “credit crunch,” no evidence of credit problems has appeared on Main Street. It is a Wall Street issue. Regular borrowing activity was reported by 35 percent of the owners, unchanged from May and typical of readings for the past 15 years. The net percent of owners reporting loans harder to get in recent months fell one point to a net seven percent (eight percent said “harder,” one percent said “easier”).”

The NFIB’s statement is all the more interesting when you consider that the NFIB’s Small Business Optimism Index is at historical lows. Here is a look at the Optimism Index for June 2008:

While it’s not a pretty picture, the silver lining is at times like these, factoring can avoid having to apply for loans. With factoring, you’re not seeking credit, but rather are getting to use your own money faster. The money due you can come in more quickly. In effect you self-finance your business.

I am glad to see that students at Hunter College and Brooklyn College are encouraged to write and publish on the web, after their articles have been edited by the faculty. Here is an excerpt from Suzanne Macguire’s report, Boost Your Business With Effective Financial Management.

Receivable factoring or credit card factoring is another unique working capital management strategy, whereby the businesses sell their future receivables at a discount. However, it is not possible for all small businesses to document their receivables in order to qualify for this financing option. The documented sales volume and credit card sales activity of these small businesses serve as financial asset to attain a business cash advance or a merchant cash advance. (NyCityWatch.org)

I want to tell the students at the faculty that documenting receivables is usually not much of a problem for the small businesses who use the Facteon factoring services.  If you have an invoice that’s due you, you just send Facteon the invoice and provide some information including a contact at the customer that owes the invoice, and the factoring company takes it from there.  Please read our FAQ for more information.

I found a really interesting article by a U.K. businessman who goes by the nom de plume of the “Unknown Entrepreneur.”

The title of the article is a tad sensational, but the article is actually well-balanced despite sounding negative at first.

In it the Unknown Entrepreneur talks from personal experience about the positives and negatives of his experience with factoring in the U.K. He writes:

“The positives

1. Increase your cashflow - allowing you to focus on your daily business activities.

2. Insure your risk - it can cost you but remember if you have a net profit of 10%%, any loss your suffer you will have to write ten times the revenue to recover the loss.

3. Fees can be negotiated - as you grow and if you have a clean book you can negotiate your fee down.

4. Your own back end office - if you opt for for confidential factoring your client will not know that you factor and you then collect out your own ledger then pay your factor the money you collect out.

5. If you do not have a back office then non - confidential factoring can be a great bonus as the factors chase the money that you are owed and this can be an advantage as the factors will apply pressure when you need it.”

The author also includes some negatives relating to invoice factoring, including several points that were lessons learned from a particular instance where his company had made an operational mistake. But even though that situation was difficult for his company, he says he would use a factor again, noting in part:

“Keep your operations tight and you will benefit from using factoring services… I would absolutely use factors again but this time would ensure that we would not make a operational mistake like we did.…”

It is always interesting to trace something back to is origin and look at the roots of a certain economic phenomena. Tom McCarthy, senior financial consultant in Texas, has written a post with the title, History Of Invoice Factoring - From Past To Present!

I don’t know where the information came from originally or even how accurate it is, but it certainly makes for an interesting story. To the extent that it is accurate, it shows the interwoven nature of factoring and day to day business. Factoring has an ancient history and is a well established form of funding for a business.

He writes, in part:

Elements of factoring can be traced back to the Mesopotamians, who are credited with being the cradle of civilization and the first to generate business code structures and government regulations for commerce. Experts have evidence that proves 4,000 years ago, the Mesopotamians also created the concept of factoring. Following Mesopotamia, there is evidence that the Romans sold promissory notes at discounted prices. Roman merchants also enlisted the services of collectors to settle trade debts. But factoring as we know it today got its start in the Middle Ages. * * *

By the time English colonists settled in the new world, America, this type of financing had become common. Both English settlers in the new world and English merchants were in prime situations to make lots of money. Due to the time distance in getting their goods, by boat, from the colonies back to England and vice versa, these merchants could have gone bankrupt waiting on their money. Cotton, timber, fur and tobacco industries all spurned their own factoring segments. Merchant bankers in London advanced funds to colonists for goods and materials before they made the journey across the ocean. They would ship their goods to the colonists or back to England where one of these factors would pay a discounted rate to the seller before the voyage and afterwards take a percentage for selling and collecting the money owed.

Factoring became a common business practice. Until the 1700s, England and the US shared a common law framework. Originally, English law forbade the selling of invoices unless the debtor was notified in advance. Of course, the United States developed its own government. In the late 1940s United States almost wholly adopted non-notification factoring arrangements and witnessed a boom in factoring in textile industries and transportation industries.

When did you first hear about factoring?

It is interesting to see how alternative ways of getting financing are popping up on the market.

An article on the SFGate site explains that there are fewer SBA loans backed by the government available at the moment as well as pressure on regular banks — all giving fuel and opportunity for alternative financing.

It is a positive sign (even in the midst of a slow economy) that small businesses still find a way — they find ways of receiving money to finance the startup and expansion of their businesses. Here is an excerpt from the article:

These days, small business owners like Metzger have to be creative about getting the money to start and expand their companies. Many are turning to non-traditional sources, such as credit unions. Increasing numbers are going to online lending Web sites that cut out the traditional bank middleman and to factoring companies, which buy companies’ future revenues.

Factoring is enjoying a cyclical upturn that it often sees during economic downturns, while credit unions and online social lenders hope the uptick in their small-business lending volume survives even after banks’ lending returns to normal. …

The article makes some sweeping assumptions about factoring and assumes that all factors operate the same. However, even so, the basic point of the article is a good one: small business owners like you have more sources for getting funding for your business than the traditional SBA loan or bank loan.

Just because the Small Business Administration is giving fewer loans under their main loan program doesn’t mean funding is drying up across the board. (According to the online lending auction site Prosper.com, Small Business Administration gave out 17.6% fewer loans compared with the same period last year.)

By now, the so-called subprime mortgage mess is probably old news to you. Some lenders who made higher risk loans got caught with their pants down.

Inevitably, that has caused some lenders to ratchet back on new loans, as they work to resolve delinquencies and credit issues.

Now there are a few signs that the small business loan market may not be immune from issues. Some lenders say they are experiencing higher levels of delinquency among small business loans. Lenders such as Bank America, which offered “express” loans that could be secured in as little as 24 hours, up to $100,000 with little or no collateral, are now dealing with delinquencies, they say. As a result, they have discontinued the express loan program.

What’s hard to tell is how widespread this issue is for small businesses. It looks to me like Bank America was very aggressive in trying to grow its small business loan portfolio. It overly relaxed its underwriting standards to achieve that goal. That’s been a recurring refrain among lenders over the years and decades, and not just with small business loans. Aggressive growth always brings extra risk.

But, to the extent that credit is tightening, just remember that factoring may be an alternative. Factoring is not credit. Factoring is about accelerating cash flow (invoices receivables) already due you. The primary issue is going to be your customer’s likelihood of paying their invoice they owe you. Your borrowing ability and debt level is not the main issue with factoring, as it is when you go to get a loan.

How often have you heard the phrase, “the check’s in the mail?” It must be often enough that the market for factoring is growing. And now it looks like the factoring companies are turning into chains.

From the Financial Post in Canada comes a story about franchising of factors.:

“The cheque’s in the mail.” How many times have you heard that? For small business owners and contractors, it’s a phrase heard all too often and it evokes wry grins or agonizing groans, depending upon whom you ask.

Even when dealing with household corporate names, delayed payments are surprisingly common as head offices decide contractors or vendors can wait another 30, 60, or even 90 days for whatever reason. It turns out companies that provide interim financing to these struggling small business owners by purchasing their creditworthy, outstanding invoices — minus a fee — comprise a thriving, if little-known, global industry.

It’s called factoring and it’s worth an estimated $1-trillion a year worldwide, with $100-billion of that in the United States and about $4-billion in Canada ….

This must be a signal of a new trend in the factoring business. If entrepreneurs have come up with this kind of franchising idea, my guess is that you have strong potential for this industry and we will see a growing international scope later on.

But don’t underestimate the value of experience. Facteon, at around 8 years old, caught the curve of this industry early and has the track record to prove it. Plus, there’s personalized service that’s hard to match through a franchised approach.

The official figures suggest we are not in a recession. However, commentators, economists and your brother and his next door neighbor are talking about a recession.

OK, so we can debate all day whether it’s a recession — or not. But whether we’re “teetering on the brink of recession” or in a recession, how about being proactive?

The CPA Trendlines blog polled some CPA pros for strategies to beat a recession, in the article “Recession Tips from the Pros.” One of those strategies hit home particularly well, from CPA Brian Brown, who said,

“CASH FLOW, CASH FLOW, CASH FLOW!!! Track it, analyze it and project it. Without it, your business will come to a screeching halt very fast. The best laid business plans and products are worthless if you can’t pay employees and vendors in order to carryout the basic operations of the company.”

Keeping the cash flowing is always important, but becomes doubly so during tight economic times. Why? Because that’s when payables tend to get even slower. Everyone starts watching their own house, and stretching out how long it takes to pay.

All the more reason to pay close attention to your cash situation. If you have done a yearly or quarterly cash budget, make sure you are comparing it to your actual cash situation each month, or maybe twice a month. That budget isn’t any good unless you use it. If you don’t do a cash budget at all, maybe it’s time to start.

For resources on setting up a cash budget, visit:

Prepare a Cash Budget
How to Prepare a Cash Budget

And remember that if your cash situation falls short, contact Facteon for solutions to accelerate payment of your invoices and quickly increase your cash flow.