Friday, September 9, 2011

Factoring as an Option

It doesn't seem all that long ago that factoring was considered a horrible, last ditch option for funding and that the impression customers got of it was that your company was six feet from six feet under.

With the credit markets still artificially tight due to the Fed paying on reserves and Washington DC too captured to prosecute or hold accountable the greedy who caused the mess we are in, alternative sources of business funding are coming to the fore and are being accepted and promoted as valuable methods of financing in a very challenging environment.

It is often a concern of business owners: What will my customers think if they were to find out I factor my receivables?

While this is something that should be considered (and discussed with a potential factoring partner - how is the customer interaction really handled?) it is essentially a reflection of the business owner's own worry about perceptions relating to their business and their abilities, not so much an issue for the customer base.  Psychologically, we as humans do not want to show weakness.  This is particularly true of those of us who are incapable of bearing children due to...shall we say, the lack of necessary equipment for doing so.

Factoring is not necessarily a sign of weakness - granted, there are situations where a company might be in such a predicament that factoring may be considered, but if the company's going concern status is questionable, most factors will pass on funding the deal (DIP funding is an altogether different topic, but can be done also).  Actually, factoring your receivables can and should be viewed as a strength.  You are using other people's money to provide terms to customers, take advantage of early pay discounts with vendors, smooth out cashflow, cover payroll and expenses, grow your company, capitalize on new opportunities for growth, utilizing the credit decision support and invoice collection expertise of a specialized firm, and on and on.

Most companies that I work with have customers that range from small mom and pop stores to huge multi-nationals.  What we are finding lately is that many of the larger customers are well aware of factoring and how it fits into SME financing, and that the smaller mom and pop companies are finding out about it as well.  Interestingly, as of a few years ago there was a report that about 75% of small to medium sized business owners did not know about factoring and how it could be used to fund their business. More importantly, the idea of a vendor using factoring as a means to fund their business is becoming more widely accepted as "normal".

Take for instance the June 2011 issue of The Costco Connection.  A little background:  The Costco Connection is a magazine sent out to all Costco Members. It is the fourth largest magazine by readership in the US (8.3 million monthly subscribers as of December 2010, they print about 96 million copies of the magazine annually) and the second largest among households earning $250k or more per year (it lost out to People Magazine, why readers are interested in the comings and goings of overpaid celebrities is still beyond me...surprisingly it beat out National Geographic who was third on the list). 18% of The Costco Connection readers are millionaires, and 55% own their own businesses.  Not bad for a magazine printed by a retailer/wholesaler.

In the June issue, there is an article on page 21 that discusses the cashflow crunch and how to deal with slow paying customers.  Factoring is referenced as a means to solve the issue. 

In the August 23rd edition of Business Week's Today's Tip, factoring is listed second (behind asset based financing, which can be almost as challenging to obtain as traditional bank financing in some instances) as a good option for financing a business.

As we head towards a still uncertain future with the economy and the markets weakened and staggering, factoring is a valuable alternative to fund your business.  Whether your bank is restricting availability, politely asking you to find other sources of funding, not funding on your export sales or purchase orders, or you might have a new business unable to secure traditional facilities, I would encourage you to look into factoring (and PO funding) as a means to achieve your goals.

Please feel free to contact me if you have any questions or if you would like a quote.
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