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There are many factors out there. Many are predators.

Some positives:
*For a rapidly growing company, banks will not give you enough money to make it possible to grow rapidly. So, factoring saves the day.
*There are many things that a factor might be able to help you get, that you would not be able to do on your own. A vendor might be willing to extend you more credit because a factor has stepped in to give some assurances. You might get a large order that puts you over your credit limits with your vendors, but a factor can often help make it happen.
*You can use the factoring to help reduce costs by getting discount terms from vendors in which you essentially pass the cost of factoring onto them.
*Another great positive about factoring is they can help you avoid bad deals. I hear it all the time, whether it be a long term customer or new one, a factor monitors the business credit and if some negatives pop up they could save your company from a devastating blow by avoiding a bad deal.
*In the transportation industry, I know of factors that are constantly benefitting their clients by helping them avoid the transportation brokers that are dead beats.
*Often times a factor (who has lots of expertise on managing AR) can reduce your DSO (Days sales outstanding) bone to a much more reasonable time frame.
*It can be a great way to outsource part of your accounting functions. In particular the credit manager position. A factor will limit it's exposure by limiting how much credit is extended by any one customer of yours. If you follow their rules, you will likely save your self some write offs.

Some Negatives:
*Factoring is not cheap. You might need to increase your prices a few percent.
*Be sure your company manages the cash well.
*Be sure to read the entire agreement. Some factors have some major penalties for ending the agreement early.
*The better factors tend to have due diligence fees up front. This allows them to weed out the non-serious companies. It reduces their up front costs and therefore also will get you a better price.
Typical fees are 3 points for 30 days. 1 pt per 10 day period after that.
Be sure the terms of the agreement are re-negotiable. It is a relationship that is built on trust over time. So, later on you can get a better deal (or be sure that you can.)

Some options out there:
*No terms, 6 or 12 month term (the longer term is usually better price and you can usually reduce the price if your AR shows some improvement.
*Factor all invoices. (There is always a percentage not funded or ineligible. typically it starts around 80% for many companies and can increase over time.)
*Factor some of the invoices, but all of any one customer.
*Factor selective invoices as needed.
*You can have recourse or non-recourse.
For recourse type factors, they don't take on as much risk because after 90 days, they charge you back for the invoice. Sometimes this can reduce your upfront cost.

Some things to do/comments:
*Be sure to get some copies of reports. I know CPA's that get headaches trying to reconcile between acutal deposits and what should have happened.
*Talk to them about their credit policies. Try to get an explanation of what they will and will not approve (as far as which customers they may or may not approve.
*Not all big name stores have good business credit. In a factoring deal I did for a fashion designer looking to sell to some big name retailers, I found that the factor would not factor certain retailers because of the reputation for charge backs. One way the retailer made money was to essentially only pay for 28 or the 30 garments sent to them.
*Later you might also get into something that looks a lot like a line of credit with the factor.

posted February 26, 2008

There is no catch. Factoring is a traditional tool of invoicing. The factoring firm takes the risk and collects the money for you, and in return they get a percentage.

Links:

• http://www.remborpartners.com

posted February 26, 2008