Factoring Blog - For Small Businesses

Go to Entrepreneur.com and read Yun Lee’s article, Factor Your Receivables for More Cash. It’s an overview of the factoring topic and points out questions you should ask of a factor.

Here’s one thoughtful note the article makes:

Finally, put yourself in your customers’ shoes and inquire about what the invoice handling process will be like from their perspective. Look for a company that is as focused on customer care as you are. You should know that many factoring companies adhere to “notification factoring” where it is clearly indicated on the invoice that payment should go to the factor.

Another point mentioned in the article is that pricing is crucial. You need to know what the factor charges.

Facteon believes pricing is crucial, too. And you should not have to guess what a factor’s fees are, or be confused by them. One of the ways Facteon is different in making its factoring fee schedule available on the Web. And, the fees are based on a straight percentage and volume of invoices, and are easy to calculate — no complex formulas.

Related: 10 Things to Ask Your Factoring Company.

If you want to check out a place for comparisons of CD rates, credit card offers, bank rates, etc., go to Bankaholic.com (”Bringing you the best in banking”).

As a business owner, you may find the reviews of business credit cards interesting. The design and layout is user-friendly and I think it is a good idea to use the blog platform as a main function of the site.

I like the outspoken attitude in the blog posts. Maybe John Wu has been trained by Jim Cramer of TheStreet.com. The site is “powered by TheStreet.com”.

As an example, read the post, Is Your Bank Safe from Collapse? and watch the embedded YouTube video. Here are some quotes by John Wu in an article (End of Cheap Credit Hits Homes, Businesses) by Steven Mufson of The Washington Post.

For a country of consumers addicted to debt, a possible sign of a change can be seen in places like the Web site Bankaholic.com.

Founded a year and a half ago by John Wu, who turned a project from his student days at the University of California at Berkeley into a rapidly growing business, the site offers a first stop for consumers shopping for credit cards and mortgages. About 750,000 people visit the site every month, Wu says.

But these days, Bankaholic finds that consumers are shopping more for savings accounts and certificates of deposit than credit cards — and, to lure them in, banks have boosted their ad spending on the site. “Banks really need depositors to put money in them,” Wu said. “They’re desperate to get more money.”

That could frustrate the Federal Reserve, which has been cutting interest rates to boost economic activity. But many banks aren’t passing the lower money costs made possible by the Fed along to consumers or businesses. The interest rates on credit cards have dropped modestly at best, and 30-year mortgage rates have not declined substantially, Wu said.

“People have been expecting that credit card rates would come down. But because there’s greater risk now in lending, credit card companies have been raising their rates a little bit as the Fed has been cutting,” Wu said. (Washington Post, 03/18/08.)

Please give us your tips on other interesting sites in the comment section.

P.S., remember, factoring is not debt. You can factor your invoices without taking on any more debt.

Tom Nort, the CEO here at Facteon (pictured right), was recently interviewed on Internet radio. It’s 24 minutes in which Tom discusses factoring in a conversational interview format.

Tom notes that speed is probably the number one advantage to factoring. You may think that if your customers pay invoices slowly because their internal payables processes drag on, you have little choice.  But by factoring the money comes in quickly — in hours or days, instead of weeks or months.  You don’t even have to change your business in order to get paid faster.  

An overlooked benefit of factoring is that it takes the place of infrastructure for an accounts receivables department.  As he points out, many small businesses don’t have the staff or systems to adequately track receivables and stay on top of them.  A factoring company can operate as an outsourced receivables department, collecting your receivables in exchange for a fee. 

A typical factoring client is a company a few years old.  The client company may be run by someone who worked for a larger company and went out on their own.  Tom notes in the show, “They are very good at what they do, but don’t necessarily have the resources or infrastructure to stay on top of receivables.”  Engineering firms, software developers, small manufacturers, construction firms — these are just some of the typical companies that use factoring.

He also points out an advantage over a traditional lender:  that factoring does not involve doing a credit analysis on your business.  The focus is on the credit-worthiness of your customer, not on your personal credit as an entrepreneur. 

Tom says many entrepreneurs have suffered dings to their personal credit simply due to starting a business and the cash pressures it imposes.  That’s a fact of life of being an entrepreneur. With factoring, these entrepreneurial dings to your personal credit don’t disqualify you from getting funding.

Tom also mentioned that Facteon is different from other factoring companies in that it publishes its rate schedule right on the Web.   Anyone can see it and know in advance what factoring will cost, and make an informed decision. 

Tom also talked a little about his own experience — that he started a business and would come up short when he has payroll to make. Facteon has now been in business 8 years.

It’s a relaxed and informational interview — definitely worth listening to.

You can listen to Tom Nort’s interview by clicking on this MP3 link.  Or you can head over to the radio show website where there is a write-up and a flash player to listen.

There is an introduction to factoring over at the OPEN Forum blog. Check it out: Factoring Receivables: When it Makes Sense, When Not.

It is surprisingly hard to generalize on the topic. There are so many different permutations of factoring — by industry, by size of business, by type of factoring.

The biggest point made was the need to view factoring as a matter of your financing strategy. It’s all too easy to treat it as a matter of fast necessity (and it can definitely solve short-term cash needs). But for the right type of business it can be a long-term cash-flow strategy that obviates the need for bank loans or works in addition to bank financing.

I was doing some digging around over at Work.com. I discovered that the Facteon blog made the list of resources in the Guide to Small Business Factoring. It’s nice to be recognized!

The article suggests that factoring is right for businesses in these circumstances:

• Seasonal businesses
• Start-ups
• Undercapitalized businesses
• Businesses experiencing rapid growth
• Businesses that can’t secure traditional bank loans

You can find some other interesting articles on factoring in the Business Financing section at Work.com.

This article from the U.K. suggests factoring can be used by startups to avoid giving away equity to angels or VCs:

In the last few years more people than ever are leaving the safety of their careers for the excitement and challenge of being their own boss.

However many start-up businesses are keen to get an investor on board in order to get the capital they need to grow, when in fact they may easily be able to secure another form of finance that is less costly, in terms of both cash-flow and equity.

Before deciding to give away any amount of equity in your fledgling business, it is wise to explore all the other financial routes thoroughly. Whatever type of finance you go for should be considered against how you intend to use the money.

If your problems stem from being unable to pay for such things as suppliers, overheads or staff, then there are a few finance options that will solve cash flow issues. These types of finance are also used by many businesses for facilitating growth; management buy-outs; management buy-ins; and other activities that require a fast and large cash injection.

While I would agree with the benefits of factoring as outlined, I think the use of the terms “fledgling” and “startup” need to be defined or they could be misleading.

The question is, does the word “startup” mean a brand spanking new company, birthed last month?  Or does it mean a young company but one with some traction.

A lot of raw startups — one year and under — simply don’t have enough revenue coming in to make factoring viable. If you’re just 3 months in business, struggling to make sales (as many newborn businesses are), and have limited invoices, then factoring may be premature for you. 

On the other hand, if you use the startup term in a broad sense to mean a young business but one with some time under its belt, established customers, good billings but a need for cash flow, then I can see factoring making sense.

Some factoring companies are general and handle invoices in a wide range of industries.

Others specialize only in certain industries or certain types of invoices.  Some specialize in the garment industry; some in service industries such as staffing agencies; and so on.  Along with specialization, you may find that some factoring companies exclude certain types of transactions or industries. 

So why the specialities and exclusions?  Sometimes it’s because of special legal requirements in those industries that may involve greater due diligence.  Some factors simply are not prepared to handle certain industries if it means specialized due diligence or procedures — they leave it to the specialists.

Take, for instance, the following two examples of specialized invoices:

Construction Industry –  In the construction industry suppliers and subcontractors to a project often have special lien rights until they get paid for their work (e.g., mechanics liens).  Unless a factoring company is familiar with lien laws in your state, it may not be prepared to get involved.

Federal Government Contracts – When it comes to Federal contracts, a special law applies to assignment of those contracts:  The Federal Assignment of Claims Act  (31 U.S.C. §3727 and 41 U.S.C. 15).  This Federal law imposes specific requirements on factoring of receivables, including special notifications and sign-offs by government officials.  A factor that doesn’t see many government invoices may not be equipped to deal with the special requirements.

Many factors, such as Facteon, are general rather than specialized. They cover a wide variety of industries.

The best thing is to just ask. A phone call takes just a few minutes. The factoring representative will tell you immediately when you call if they can handle your type of transaction.  Look, they don’t want to waste your time or theirs.

Facteon handles most types of transactions, with just a few exceptions.  Pick up the phone and call 888.673.3863 (or have them call you) and you’ll learn immediately whether your type of transaction is eligible.

One of the facts of business life today is that the law has become complex and the body of law that an attorney must know has become much larger.  There are simply more laws on the books and more legal considerations to take into account.  That makes the attorney’s job much tougher today than in the past, I think.

On top of that, factoring is not as widespread as loans, credit cards and other sources of financing.  As a result, some attorneys may not be as familiar with factoring transactions as with other kinds of financial transactions.  For instance, even experienced business attorneys are more likely to be more familiar with loans and mortgages than with factoring. 

And you have to keep in mind that no attorney (or human being, for that matter) can be expected to know everything.  It just isn’t reasonable to expect.

The folks at Facteon make it a point to keep the paperwork for factoring as straight forward as possible.  A good starting point for an attorney tasked with helping a client review a factoring agreement is to take the Facteon factoring test drive, which is essentially some background information about their factoring process.  If you are an attorney, or if you are a business owner or manager getting your attorney involved, start them there. 

Another good source of general background information is the Wikipedia article on financial factoring.

The better the grasp on the transaction fundamentals and the roles and responsibilities of the players, the better equipped the attorney will be to provide guidance and advice.  And the attorney will also have a better idea of what’s reasonable and customary — and what isn’t — in factoring transactions.

Replacing employees — good employees — can be very expensive.  I think we all know that.

All the time the hiring manager has to spend recruiting, interviewing and bringing up to speed a new employee.  Recruitment fees. It can get expensive.  Consider these costs you might not have thought of (from an article in About.com):

• Time to review resumes
• Time to interview candidates
• Interview expenses for candidates
• Possible travel expenses for new hire or recruiter
• Possible relocation expenses for new hire
• Additional bookkeeping; payroll, 401k, etc.
• Additional record keeping for government agencies
• Increased unemployment insurance costs
• Intellectual property lost
• Corporate history lost

The article quotes one source that claims it costs $58,000 to replace a customer service rep earning $18,000. Regardless of whether you agree with those numbers, I think you’d have to agree that replacing employees is expensive.

So just remember that the next time you get a little aggravated and are tempted to lose your temper over something one of your employees forgot to do or a task completed a little sloppily. Consider that the cost of coaching that employee and working with him or her to develop better skills could be a much better financial decision.

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).