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  • Fast Growth Companies
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Factoring Facts and Pitfalls

Home/Solutions/Working Capital Financing/Factoring Facts and Pitfalls
Factoring Facts and Pitfalls 2016-10-14T00:09:17+00:00

 

Confused about Factoring
Quick Facts About Working Capital Lines, Factoring and Accounts Receivable Lending


Below are some very important highlights about Factoring, and Factoring Companies that you need to know. While it may seem like the Factoring industry could be a risky place, there actually are a handful of Factoring companies that are GREAT, and a pleasure to deal with. Learn below what to look for and what to look OUT for…

 


  • DEFINITION OF FACTORING : Working Capital Lines and Factoring Facilities allow a company to use it’s Accounts Receivable as a collateral base for a secured “line of credit”. By Factoring an Invoice a company either sells or pledges the payment from the invoice to a Factor, who in turn will advance a percentage of the invoice (typically 80%) to the business. The Factor will then forward the remaining 20% (the Reserve) upon the invoice successfully being paid, less any fee the Factor charges.
This is an Excellent tool for businesses to use to accelerate their cash flow, make payroll, have access to capital much quicker than waiting on the traditional Net 30 customer to pay them, and allow the business to continue to grow at a much faster pace.

  • CAUTION #1 :The Factoring Industry is highly fragmented, dis-joined, and in fact is unregulated. This leaves the business owner without many safeguards to insure they are both treated fairly, and that the Factoring provider they are considering is honorable, financially stable, and reputable.
  • FACT #1 : There are approximately between 500 to 700 Factoring Companies throughout the U.S.
  • FACT # 2 : Of those 500 to 700, about 90% or more are small “Mom & Pop” businesses, often operating either from a residence, or a small office environment.
  • CAUTION # 2 : Most Factoring Companies are started and continue to run, using a majority of borrowed funds from a bank line of credit. What this means is that the funds which these Factors extend to businesses for their Invoices, are highly controlled by the supporting banks covenants. This greatly limits the terms, conditions, and parameters that the Factor can consider, and thus even more greatly limits their ability to be creative, think outside of the box, or handle unique clients needs.
  • FACT # 3 : Factoring dates back to about 1620 in the U.S., and was primarily used in Merchant Banking (farmers who sent crops overseas could be paid at the dock, for a discount, instead of waiting for the money to come back from England)
  • FACT # 4 : In the United States the number of Factors who are larger than $1 million in Funds Deployed, and who are self-funded, meaning do not require a bank line of credit nor the covenants and baggage that come with it, is less than a handful.
  • CAUTION # 3 :The vast majority, more than 98% of Factors, seek to attain a minimum of a 1 Year commitment in their contracts. This locks the customer into doing business with only that Factor, for that period of time. The downside to this is similar to the cellular phone industry: Once they have you, they can treat you how they want to. To escape this poor treatment, you must pay an exorbitant “exit fee”, often 3-10% of the line size. A $1million line would cost you upwards of $100,000 in exit fees to break your contract with them early.
  • CAUTION # 4 :Many Factors tend to present Terms Sheet (offer letters of interest in doing business with you, that includes the pricing and terms) that have multiple pricing levels and components. An example would be a Term Sheet that has pricing of the Wall Street Daily Prime Rate + 2%, and then a 1% “Origination Fee”, with a 0.025% daily balance fee. By the time you figure all of this out, you could have opened your own Factoring company.
  • FACT # 5 : Factoring is an unregulated business. It does not fall under the oversight of the FDIC, the Comptroller of the Currency, the Frank Dodd Act, the Sarbanes Oxley Act, or frankly any other regulatory body. While this is good, in that it does not burden the factoring industry with unnecessary legislation, it also gives the end user reason to strongly research the satisfaction levels and background of perspective factoring companies.
  • CAUTION # 5 : Because factoring is not regulated, fee disclosure statements are not required. Therefore, many, many factors have what is known as “Back End” fees. This is where they will charge for any and every thing it seems they can. Examples are $10 for every invoice submitted, $150 per month UCC search fees… etc. etc.
 
Above are just a few of the many things you need to know before signing up with a Factoring company. There are many more not listed on this page. For a comprehensive list of things to look for and pitfalls to avoid be sure to read more in our Factoring Blog & Advice section.