Factoring Blog - For Small Businesses

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.

A recent Kansas City Star article points out several advantages to accounts receivable factoring.  It notes that factoring can be very helpful for businesses in these five situations:

• Business-to-business companies.

• Startups with strong accounts receivable.

• Accounts that take 30 or more days to pay.

• A special job or project where payment will be delayed.

• Cash-strapped businesses needing to meet a payroll or take advantage of a supplier’s cash discounts.

Another advantage the article points out is that factoring can help preserve a relationship with a client, because you don’t have to get unpleasant about collecting invoices that are more than 30 days due. One business owner quoted in the article says, “it keeps the relationship with clients pure.” Very interesting take on the value of invoice factoring.

Read: Setting Strategy: Factoring provides alternative to loans

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. 

One of the biggest questions business owners have about factoring is:  what do I tell my clients? 

In other words, “how do I notify my clients that a factor is involved?” The unspoken concern here is whether clients will get confused or misunderstand.

The fine folks at Facteon have come up with a set of 5 tips for what to say to your clients to make them comfortable with your decision to factor your accounts receivable invoices. 

Perhaps the most important thing is how to position your decision properly right from the get go.  This tip is especially important:

Tip #1: 

Working with Facteon helps me fuel my Company’s growth.

Selling invoices (receivables) to a third party like Facteon has been a standard business practice for hundreds of years. Our business is not in trouble. In fact, it’s just the opposite: it is growing fast and Facteon accelerates my cash flow to fuel that growth.

It’s like anything else in business: you set the expectations with your clients. How you choose to present the decision to clients will shape how they perceive the news. And to your clients it really is just business as usual, except for where they send their payment.

Read all five tips: What to tell your clients about accounts receivable invoice factoring.

The Biz Info Library has an excellent tutorial that demonstrates what happens if receivables grow faster than sales.  You can become a victim of your own success, as cash gets squeezed.

That’s where the power of factoring comes in.  Factoring can be a strategic move, to fund the growth of your business.  In essence you’re just leveraging the funding inherent in your business.  Factoring your accounts receivables is not just a quick fix to meet payroll when you happen to run short or such.   Running the numbers can really help you understand the power of factoring to grow your business.

Read:  Factoring:  Funding Secrets of the Giants

At this time of year, starting on Thanksgiving Day and going through the end of the year, we like to give thanks to you, our loyal factoring clients.

From all of us here at Facteon, we want to thank you, our loyal clients, for your business.  We are glad to serve you for your cash management and factoring needs, and look forward to working with you in 2008 and beyond.

– Tom and staff

Following on my post last week pointing out how things are looking optimistic for many small business owners (Is the Economy Booming for YOU?), I carefully read the October 2007 NFIB Small Business Economic Trends report.  This little nugget was hidden in the commentary:

The NFIB indicators suggest that owners have seen the “bottom” and are expecting the economy to gradually improve in the months ahead, even with housing still struggling to find its feet.   ***   Even with all the nonsense from the financial markets and the media, owner optimism improved and spending and job creation plans look better.

And that brings to mind an important point about sometimes NOT listening to the financial news. 

For instance, you can’t turn on the nightly financial news without hearing about the “housing marketing crisis.”  Certainly anything housing-related ranks among the weakest parts of the U.S. economy. 

 However, the other side of the story is that the housing market problems have  geographic differences.  The parts of the United States where housing prices had a huge run-up over the past few years have been hit hardest. They had the most to lose, this being somewhat of a fall after a housing bubble.

Some have argued that the housing bubble is really a series of smaller, regional bubbles that vary by geography. Parts of the country have not been hit as hard. Why? Because they never saw the big run-ups in housing prices and the sizzling real estate activity in the first place. Their gains were more modest during the boom times. Supply and demand tended to stay on a more even keel. As a result, the current housing slow down may not hit as hard in those parts of the country. Also, local regional conditions affect local housing markets to different degrees.

My point? 

Just this:  if you were not in a construction or housing-related industry, you may have remained relatively unscathed through this weakly growing economy we’ve been in during 2007. 

Many small businesses (mine included) react more to micro-economic factors and local or industry-specific conditions, rather than to macro-economic trends.

And so, as you hear the financial news about the housing market blues, or the subprime mess or the stock market plunging one day, consider that those factors may have little impact on your own business. Maybe they will, depending on the industry you are in or on local conditions.  But then again, maybe they won’t.

Sometimes it just pays to take the gloom-and-doom financial news with a grain of salt.  Otherwise, you could just psych yourself into a negative mindset and then it will become a self-fulfilling prophecy.

Instead, concentrate on your business — work it to make it as successful as possible.  Make sure you have sufficient cash to weather any temporary conditions.  Credit is still readily available:

– If you use credit cards to pay business expenses, you will still have those available.

– If you factor large receivables in order to speed up your intake of cash, you’re going to find factoring is available too.  

– If you use a line of credit, you’ll find that available as well.