I have received some phone calls this past month from newer entrants to the factoring industry asking me about this conference and if it is worthwhile to attend.  I respond, with full disclosure that I am actively involved with supporting the IFA and say wholeheartedly “OF COURSE!  This conference is a must for any professional associated with receivables finance in any way.”  I say if you can only afford (both in terms of time or money) to attend one conference each year then this is the one.  Yes, you can probably purchase an audio CD after the event – but that’s only half of the draw.

The people that you will meet at this conference you are likely to develop relationships with that will serve you well over the course of your career or through the growth of your company.  I’ve watched alliances form over the years… folks that met each other for the first time who nine, ten, and even 12 years ago are now engaged in participations together, have bought and sold portfolios amongst each other, and have hired one or another in various roles.  I’ve met owners of factoring companies who started with nothing and have grown their portfolio to wild heights.  I’ve met others who have built up a portfolio, sold it, and are now in their second round.  Sad to say, I have seen folks come and go too.  I’ve met new business development people who have moved up the ranks to sales managers, account executives who have moved up to operations managers, operations managers who have moved up to portfolio managers – and many of those will go on to start their own companies.  The amazing thing is that almost all of them will take a moment to provide advice and share war stories, or in general, they are just pretty fun to be around.

It is important to note that it is not just other factors who attend this meeting; Vendors, service providers, attorneys, complimentary businesses also are in attendance – these too can be healthy contacts for you. For example, I really enjoy the folks over at 20/20 Tax Resolution, Ansonia Credit, MotherFund and First Corporate Solutions just to name a few. They know their business and the factoring industry well. Think about it: Where else can you interact with the likes of Mike Ullman, John Beckstead and Steve Kurtz? Even the face reader guy, Mac Fulfer, is scary “spot on” with his observations, and Brian Van Nevel (who must have been a game show host in a past life) will channel his inner Alex Trebek for a very educational round of Factoring Jeopardy.  The creator of the Factor Guru blog, Genevieve Merritt, will be there as well as all the other contributing writers such as myself, Scot Pierce and Rich Eitleberg.

So if you haven’t already signed up… I’d be thinking of doing that soon.  The room block ends this weekend – I hope to see you in Scottsdale! It’s sure to be an educational and productive event.

This has been an amazing year so far for factors. I say amazing, but I could probably come up with dozens of adjectives and each would be fitting.  Words like challenging, tough, and busy come to mind too.  This year is different though; I have observed something markedly different than in all my history in this business, which is the huge amount of exposure our industry has enjoyed.  Never before has the word “factoring” appeared so many times in news searches on the internet.  Sometimes the stories are good, you know the ones where factoring is seen as a positive form of finance – other times the stories aren’t so great, like fraud occurring either within a factor’s portfolio or those rogue entities that raise money ostensibly for the purpose of purchasing receivables to only use the funds for anything but factoring.  CIT’s troubles alone have brought factoring into the limelight.  While I truly wish the best for that company and who knows how that will all end up, I suppose I am grateful that more and more of the population has heard of factoring just from reading about CIT in the news.

I have the pleasure of working with multiple factoring companies on a variety of projects – and in so doing have gained a very unique perspective on the state of the industry today – guess what, there are many new deals being booked daily all over the place!  Those factors who have strong underwriting and portfolio management standards as well as their own capital and access to liquidity are finally able to grow their client base simply because other forms of finance are not available.  On the other hand, there are factoring companies who struggle with access to liquidity and declining sales volumes because their client’s sales have decreased.  There are also start up factoring companies opening all over the country as they see factoring as a good business to be in – as long as those folks are seeking out education and assistance and respect established standards, they should be able to do well.  Unless every single factor I’ve been talking to is fibbing, they’ve all been busy putting on new deals – and don’t see their pipeline dwindling any time soon.  Nope, no horror stories here.

A factoring company (just like any other business) wants to make a profit at the end of the day.  This is no easy task when you consider the amount of overhead it takes to run a factoring operation.  Salaries, Credit Expense, Cost of Funds, Rent, Due Diligence Expense, Lock-Box Fees are just a few of the expenditures a factor has.  The smart ones also put a little away each month to build up a loss reserve should the inevitable occur.  To the average person on the street, when they see what a factoring arrangement is priced at, may feel it is exorbitantly high, but when you take away the actual costs to provide this service, you’d be surprised at how little of those fees actually make it to the bottom line.

All that being said – factors have to charge what they charge because factoring is labor intensive and expensive to operate.  If the factor just purchased invoices and advanced funds, they would be out of business very quickly – that translates into fewer companies providing this critical form of finance – not a good thing for the general business environment.   That would be a horror story.

I think that many factoring companies (at least those that I deal with and talk to routinely) are in this business both to make a little profit and because it’s rewarding to help companies survive by providing working capital.  No one I know is in the business of gouging their client base. Moreover, it takes effort to find a client, to perform due diligence confirming the factor can make a difference for that company and then to bring the client on board to provide financing.  We all strive at that point to keep the client active for as long as possible – the average being 18-24 months.  I recently spoke to the head of a factoring company that said they’ve been able to keep their average client to up to 30 months!

Factors actually work hard at the collection process to help keep receivables turning so that the costs of factoring remains as low as possible for their clients.  These aren’t heavy handed collection tactics, merely good old fashioned solid receivables management techniques.  The result is that the client also maintains a healthy bottom line.  Client’s who grow or mature enough to be able to qualify for bank financing make this all a win-win situation.

When I hear of “client horror stories,” I am disheartened by the hyperbole.  I guess I come from the side of the fence that a client horror story is one wherein the client  figured out the perfect fraud and then absconded with big piles o’ cash.    While there is press that suggests that factoring companies are Good, Bad or Evil – these are all emotional terms – working capital shouldn’t be emotional.

If a business needs a factor they can look to any number of resources to find the best arrangement possible.  Price and Structure should not be the only deciding factors (pun intended).  One company may offer a low rate but then require monthly minimums and a term of one year, while the next company may offer a higher rate with an easy out and no minimums.  Some companies even offer programs that adjust with the client’s sales volume.  If you spend the time to understand the differences, you’ll probably find that in the end most offers are relatively equal in costs (plus or minus some basis points).  So if all terms are equal, what can a business seeking a funding source do?

The answer: get to know the factoring company. Ask for client references, and then… actually call them.  Does the factor have a history of taking care of their clients?  How long does the average client stay with the factor?  Is it only three months?  Or is it two years?  What other services does the factor provide? Same day funding on schedules received by noon or does funding take 48 hours or more (routine funding not the initial funding)?  Does the factor understand your business?  How well do you relate/communicate with representatives of the factoring company?  Is the company secure – do you think they will be there when you need them?  Are they in the same time zone as you, and if not does it make a difference (to some it might – to others it won’t).  Are you working directly with a funding source or through a broker?  How do you know the broker is really looking at the best deal for you?  There are so many other issues besides price alone!  If sales volumes can be maintained, maybe the smaller fee with minimums is the way to go. If not, then the higher priced deal may look more attractive.

If I go back to how I started this article, I was shopping… so, look at it this way, when you buy a plain white shirt from a low cost retailer, you probably don’t expect for the shirt to last very long – seams unravel, it gets stretched out, etc…  Buying a similar shirt from a more expensive retailer probably means the shirt will cost more, but the stitching will be different and the fabric might be stronger, and generally speaking, that shirt ought to be in your wardrobe for much longer than the less expensive one.  Which do you buy?  That’s a personal decision. For me, I’d spend extra just to know I would have something of quality… something that would last.

One more thing, you know that factor that quotes a lower rate but then imposes minimum volumes – well, I’ll be willing to bet that can be negotiated.  The negotiation however probably won’t be that the factor will maintain the same low rate without minimums – they simply can’t afford to do business this way.  In order for any transaction to work, it has to benefit all parties – everyone needs to “win.”

It’s a shame when clients don’t fully understand what they’ve signed up for though.  I was taught early on to never sign something that I either didn’t understand or didn’t agree with.  I make it a matter of practice to fully read any document I need to execute and if something isn’t clear to me, then it’s my duty to learn more before signing, and that’s just personally.  Shouldn’t a business owner follow the same rule?  Imagine signing a three year lease and then three months into the lease deciding that you no longer wish to rent the space.  There will be penalties from the landlord to break that lease, why should factoring be any different?

So, I don’t have any horror stories, even though Halloween is near.  Factoring works because those providing the capital know what needs to be done in order to protect that capital, and clients understand that having access to that capital comes with a price. Clients need to look at their business critically to determine if factoring works for them or not.  The business that has very low margins probably shouldn’t factor; the businesses that have some room to absorb the costs of factoring almost always benefit by having the working capital to sustain and grow their operations.  Most factoring companies probably have tons of success stories, and even those that do will have experienced a relationship that did not end well.

I think it’s up to us as an industry to maintain how positive factoring arrangements can be for everyone – not just the factor and not just the client.  This is the business we’ve all chosen to be in and I’m proud to be a member of this community.  I don’t want to dwell on situations that I’m not directly involved in, and I try not to lay blame when the facts aren’t public.  I’d rather shout out that factors are here to serve the businesses that need our funding, and we’ve got the capital to be able to help.

Let’s all take advantage of these current economic times by continually promoting that factoring is a great form of finance!  Lift up our industry for the greater good.

Why do some deals make it and others don’t, even when they have similar characteristics? Even when you go through the company background, the receivable base and performance, financial trends and sometimes the background and credit of the guarantor, in some cases, a prospect may not fit into your box. Why?

Well, this can be attributed to just a deal that doesn’t fit within a factoring company’s target client profile. It may, however, be perfect for another factoring company based upon their niche, risk profile, or other criteria.

One other reason may be because too many holes exist. What does this mean?

Someone (I believe it was Michael Haddad, Core Business Credit) told me once that when you mitigate too many risks in a transaction… it’s like a block of Swiss cheese. There are too many holes without enough cheese holding it all together. I know… sounds weird but the analogy stuck.

Since factoring is more of an art, I think this Swiss cheese theory helps explain why.

So, what are the holes? Many look at the six Cs of credit when reviewing a prospective client transaction. I tend to break it down to four key areas instead (as I can never remember the other two as everyone seems to have a different other two): Character, Collateral, and Credit, along with Common Sense of course.

You may ask why Character first? The person running the business who has the relationship with the customers can be critical when reviewing a new transaction. How they manage their personal finances may be indicative of how they manage their business and, ultimately, how they may work with their factor or lender during challenging financial times.

Collateral remains the foundation of factoring. Some important questions to think about: Who does the company sell to (what types of customers)? How is the customer credit? What type of industry does the company operate in and what current trends are ongoing in that industry that may affect the collateral? Do concentrations exist? What does the aging reflect about aged invoices or credits? How does the company bill? When is an invoice considered accepted by the company’s customers?

The third element, Credit, can include customer credit; however, what about the credit of the company? What do their financial statements show? What is going on in the business? What is their margin and does it support the factoring expense? Are there any entries or trends that require additional explanation? Remember, reviewing one period of time only provides a snapshot; however, having prior financial statements to compare against may help show trends in the business.

Finally, Common Sense is a must. This is the key element that brings all the other pieces together. Does the information reviewed correspond to the discussions held to date? Are there any areas that remain unclear or are conflicting with the information reviewed? Have the holes been mitigated in a way that would result in a successful collection, should the need arise? Is there enough cheese… or, are there too many holes?

Wishing you success. The Factor Guru

Generally, these sales are for completed orders (for goods delivered or services rendered). This includes a variety of industries including, but not limited to, manufacturing, staffing, transportation and logistics, distributing, importing/exporting, medical and healthcare businesses, oil and gas, consulting, IT and technology, services, construction and many others. Some factoring companies will finance progressive or milestone billings, although this tends to be the exception more than the normal course of operation.

Once the invoices have been sold to the factor, the client receives an ‘advance’ of anywhere from 50% to 95% of the invoice, with an average advance rate more likely at 80% to 85%. Advance rates depend on the industry in which the client operates, billing practices of the client, and payment patterns of the account debtors. For example, a client in the construction industry may have offsets for subcontractor payments, retainage, and other industry related offsets. In this case, a lower advance rate may be warranted. On the other hand, staffing and transportation businesses tend to have fewer reasons for non-payment of an invoice, resulting in a higher advance rate being offered.

Assuming an 80% advance rate, the factor would then retain a 20% ‘reserve,’ which would be released back to the client once the account debtor has made payment to the factor (less the factoring or discount fees that have been earned and/or accrued).  Before these payments are made to the factor, this reserve is often called an ‘accrued’ or ‘escrowed’ reserve. Once the payment has been received, however, this reserve becomes a ‘cash’ reserve, assuming full payment of the invoice (or at least the funds advanced plus fees) has been received. Factors may hold cash reserves for other potential invoices that are aging out on the factor’s books, have known disputes, or where other credit criteria may deem holding such cash reserves necessary.

Factoring can be a useful tool to companies seeking capital or needing to increase their working capital cycle. Stay tuned for more details on the inter-workings of factoring and its importance to helping companies manage their cash and their receivables while focusing on the growth of their business.  

For reference, you may want to read Wikipedia, which has a good general overview of factoring including a brief history. About.com also had some other reference information on the benefits of factoring.

Happy reading. The Factor Guru.