What a Factor Is NOT

It’s just as important to know what factor IS NOT and DOES NOT do, as it is to know when a factor can be just the right answer to your cash flow problem. A few key points:

1. A factor will not normally buy accounts owed by individuals.

Let’s say you are in the home renovation business and most of your customers are individual homeowners. That’s not normally going to work for a factor. The laws governing commercial transactions and those governing consumer transactions are quite different in many respects and the factoring business focuses on the commercial market.

So, if your customers are businesses, that works; but if they are individuals, it doesn’t.

2. A factor is not a debt-collection agency.

There ARE collection agencies, of course, and if you’re at the point with a receivable where all other avenues have failed; especially if the amount involved is too small to justify litigation; the collection agency might just be your answer. You’re probably going to get a small percentage of what’s owed and write off the balance. That’s NOT factoring.

The factoring company wants to buy receivables that are fully expected to be “paid-as-agreed”. It’s just that the business that is owed the money needs it sooner than “as-agreed”.

3. A factor doesn’t want to just look at your problem accounts.

Actually most factors will not consider purchasing receivables that are over-due by more than a certain number of days. The factor doesn’t want to buy problem accounts/invoices. The principal problem the factor is in business to solve for a client is it's need to accelerate cash receipts. (There ARE factoring companies that will essentially take over a client's entire accounts-receivable operation; but those cases usually involve larger businesses than this blog is targeting.)

In most cases, as counter-intuitive as it might seem, your best bet in working with a factor is to target your most dependable customers’ receivables for sale. Dependable means just that—it doesn’t mean quickest to pay!

The more dependable the customer’s payments, the less uncertainty in the relationship, the easier it is for the factor to get comfortable with the proposed transaction.

If you’ve got a customer who sometimes pays in 10 days and sometimes in 120 days, that’s tough for anyone to underwrite. But even if your terms are “net 30 days” and you have a customer who always pays between 50 and 60 days, the dependability of that experience will probably more than offset the lack of adherence to stated terms.

4. A factor is NOT A LENDER!

This really needs to be emphasized. When you deal with a factor you are not BORROWING. You are selling an asset, the account receivable, in exchange for another asset—cash.

The idea that money is being lent/borrowed and that the charge for that money is interest, is very deeply ingrained in many business owners’ psyches. But that is NOT the essence of the factoring transaction.

Both the nature of the relationship and its financial structure are quite different in factoring vs. lending, as we’ll discuss in later posts.

The Interface Financial Group has been helping businesses with their cash flow needs since 1971. Solving cash flow problems is what we do.