Factoring Misconceptions

///Factoring Misconceptions
Factoring Misconceptions2016-10-14T00:09:17+00:00
Common Misconceptions About Factoring

  • Factoring is expensive :
    • Compared to a traditional Bank line of Credit, it is more expensive.
    • It is not so expensive however, provided you use one of the Good Factors, that it cannot be employed in most every business models financing.

  • Factoring will make me look bad to my clients :
    • NON-RECOURSE FACTORING : Ah – a VERY important point. There are numerous horror stories of business owners signing up with Factoring companies in the past who were known as Non-Recourse Factors. Non-Recourse Factoring means that when you submit an invoice to the Non-Recourse Factoring company that they actually buy that paper from you, for good. They then own that receivable. If the Receivable does not pay, goes bad, or defaults, then you are not liable to the Factor for that. With this liability on their hands, the Non-Recourse Factors knowing that they are liable for the paper, would and still do often begin very aggressive collection efforts sometimes before but always when the invoice has matured and becomes due. As your customer who owes the money is not their customer, they feel no obligation to maintain any relationship, tread lightly, or be diplomatic. They want their money, and that is all they are concerned with.
    • RECOURSE FACTORING : With Recourse Factoring, which is what all of the Good Factors offer, when you assign an invoice to them, it is for a limited period of time, often 90 days from the due date. Once that period of time is up, the options are as follows:
      • They will return the invoice to you, theoretically, and ask you to either A) Pay it off yourself by writing a check to them for the amount or B) Replace the invoice with a more current invoice. The more current invoice to replace the aged one with can be from the same customer or a different customer altogether.
      • Work with you to get the invoice paid over time by applying reserves, reducing advance rates, or applying non-factored payments that come in to you to that factored invoice.
      • In the case of the REALLY Good Factors, your agreement with them will read that if your customer should ever declare bankruptcy and thereby not pay for an invoice you have factored, you will NOT be liable for the invoice. The company that I represent, Midland American Capital, does just that.
    • With Recourse Factoring, because the invoice will get paid one way or the other, the motivation for the Factor to act as a collector is not there. The Factor, and the Good Factors do this, respects the relationship between you and your customer and wants to interfere in that in the least way possible. The REALLY Good Factors like Midland American Capital who I work for, have a philosophy that the relationship between you and your client is vital and we do not want to interfere in that.

  • Factoring Makes My Business Credit Rating Poor :
    • Not sure where I’ve heard this one before, but absolutely no truth whatsoever to this. Factors, at least none that I know of, and as the past President of the National Funding Association that is most all of them, report to the credit bureaus. The only hint that a business is engaged with a Factor would be revealed in a UCC lien search with the Secretary of State, which mostly only lenders use to determine what collateral is encumbered before lending to you.

  •  I will be stuck in a long term contract with a Factoring Company :
    • You bet you will ! Unless… you opt for one of the Good Factors, who I can only name 3 or 4.
    • The Good Factors will not require a contract term, you will be able to exit or close your account at any time, and without any cost or penalty. Again, only a select handful of Good Factors are reasonable and fair like this.
    • This will NOT be the case with 98% of the Factors in the U.S. They will want a 1, 2 or most a 3 year commitment. There will be a hefty fee to terminate early, and there are some who no matter the fee will not permit it. They also will require a minimum monthly dollar amount of invoices be factored, or in lieu of that, you will be required to pay a fee. I have seen monthly minimum fees between $1,000 and $15,000 per month, regardless of whether you factored an invoice or not.

  •  Factoring won’t work for me because I am paid quickly :
    • What happens if you’re not. Your customer makes an error, a payables clerk is out sick, you forgot to submit all of the needed paperwork and payment is delayed.
    • As a safety net, there may come times when things don’t go as planned. What will you do if those plans affect a Friday payroll that is due? Are you going to tell your employees you are waiting on a payment from a customer? Play it safe, have a backup plan.

  •  Factoring has strict rules, guidelines, and procedures:
    • Some Factors do. Some Don’t. There are reasons for this.
    • BORROWED FACTORS: The primary reason some Factors are strict is because they are required to be. The way about 95% of Factors work is : They invest capital into their business at the rate of about 25-35% of the capital they have available to lend out. The other 65-75% comes from a bank line of credit they take out. Because they are relying heavily on the banks money, the bank underwrites such “re-factor” lines with long and strict covenants. Meaning the bank behind the scenes really makes the rules. The Factor can only lend out money under the auspices of what the bank says, such as :
      • Industries they can lend to
      • Age of invoices they can lend against
      • Amounts they can lend
      • Dilution
      • Concentration limits
      • Cross collateral
      • Contra accounts
      • Balance Sheet Equity
      • Payables limits
    • SELF-FUNDED FACTORS : There are not a lot of them, and they typically are the Good Factors at the same time. These Factors rely on essentially their own money. While they may have a bank line as backup, in case a large client has a need beyond their capability, but they do not need or require it to operate normally. The Self-Funded Factors, such as Midland American Capital, whom I work for, can do as we please most times, make our own decisions, and case use rational logic to determine if exceptions to the norm should be made, and sometimes we can even create hybrid lending products to get a client through a unique situation. At the end of the day, it is our money to lend as we please, and we are not subject to bank covenants. Always look for a Factor who is self funded. The Borrowed Factors not only have their own rules, but image the banks position : They are lending money not to someone they have underwritten directly, but to a company that is going to re-lend that money. The banks are already a little overzealous on their own loans, image that scenario.

Factoring does not need to be a confusing or scary financing product for you or your business. If you work with Good Factors, and are diligent in asking them my questions that are here in my website, and the answers are correct – you’ve likely found one of the few Good Factors.

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