As a Matter of Factor
When I am engaging in a small business networking event, eventually someone asks what I do. I explain to them that I get small businesses and commercial real estate investors loans when banks can’t lend to them. It never fails that at least one person in the crowd will respond with, “Oh, so you factor huh”, after which a solemn sigh seems to be collectively released from the crowd.
Well, the “factor” of the matter is, yes, that is one of my many loan products that I can offer. As a matter of “factor”, it is one of my best products. Because of that, I would like to take some time to debunk some myths that are well entrenched in the small business world about factoring. Let’s look at the facts of factoring.
Factoring is simple to understand. Let’s say that you are a company that receives much of your capital from accounts receivable. It may take you thirty days from the time you spend some of your working capital to supply your customer with a product you sold to them, to the time your customer pays.
What if your customer orders double the amount of the product you are selling them? You have to come up with twice the normal amount of working capital to produce the order. You don’t make it a habit to keep twice the capital you need just sitting in an account doing nothing. That is bad business. So now you are in jeopardy of losing your position with your customer if you don’t come up with the capital to produce the goods your customer needs. Both you and your customer lose future sales revenue and your customer looks for another vendor to supply them with what they need.
But wait; there is a solution to the problem. What if you could find someone to buy your receivables before they are due, at a discounted price, and provide you with cash giving you time enough to manufacture and deliver your product.
Welcome to factoring. All you need to do is find a good, non-recourse factoring company.
The factor company I use will do just that without robbing you blind. They are a non-recourse factor, which means that if your customer skips out without paying your receivable, you are not stuck with the bill. How about that for credit insurance? This factor also has some of the best factor rates in the business.
Here is a typical deal. You have a receivable worth $100,000. This factor will buy that receivable for 97 cents on the dollar. They will immediately give you 80% of the receivable, $80,000. You then use the money to manufacture your goods. After the factor receives the rest of the receivable in 30 days, they will give you $17,000 and keep $3,000. Your sales revenues doubled minus 3% of the receivable.
To me, that is something to sigh about… a sigh of relief. That is a deal that not many small business owners would pass up. There are factoring companies that do take advantage of small businesses that need this service. Some factors take as much as 30% of your receivable. To that, I say, it’s your own fault for not shopping around and going with a good factor. Would you agree?