Facts on Factoring

1) "I'm afraid I'll lose control of my business if someone else is collecting my receivables."

Quite the contrary. By working with a factor, you will have more control of your business. Factors are professionals at managing accounts receivable. They will provide you with detailed management reports which you probably don't produce internally. These reports will give you insight about your business you would never otherwise have. Plus, using a factor will free you up to concentrate on growing the business instead of collecting receivables. Finally, a factor will be able to provide you with an early warning system. If there's a change in your customers' credit ratings, the factor will alert you immediately.

2) "1 don't want my customers to know I'm using a factor. I'm afraid they'll think it's a sign of weakness."

Your customers wouldn't think twice if you got a line of credit from a bank, right? You can tell them that you don't like borrowing money; you'd prefer to sell your receivables instead. Or tell them that it's the accounts receivable management that is your major reason for using a factor, not the cash advance. Another positive reason is that the factor is helping you keep up with your growth. Tell your customers that by using a factor, you can improve your service, and the customers will never have to worry about you being able to fill their orders — no matter how large they are.

Factoring is widely accepted in the normal course of business by corporate America. So many companies use factors that most customers are very familiar with them. Certain industries are almost universally factored (for example, apparel). Factors are extremely professional when they contact your customers. They'll simply explain that they're calling to verify an invoice. If an invoice is past due, the factor will call you first, not your customer. He'll let you handle your customer directly. Tell your customer that you're using a factor to keep your costs under control — you can pay your suppliers quicker and therefore get better prices.

3) "1 can't wait until I deliver the product to get paid; I need money when I get the order so I can buy the materials to produce my product."

Maybe, but maybe not. You could generate the capital you need to buy the raw materials for new orders by selling some of your existing receivables. Plus, your suppliers may be willing to extend your credit terms with them when they find out you're working with a factor. If you really do need purchase order financing, we may be able to work that out for you, too. Many factors will provide purchase order financing for you after you've factored with them for a few months.

4) "We already have bank financing"

Are you getting adequate funding from the bank? If not, you may be able to work with a factor in addition with your banker. Your bank may be willing to subordinate their lien on your accounts receivable to a factor if your company's other assets are sufficient. Or, if your bank is severely restricting your credit line, it may make more sense for the factor to pay off the bank loan for you and increase your overall financing. In addition, a factor will provide you with accounts receivable management that you can't expect from a bank.

5) "1 have AAA rated customers. I don't want to pay extra for credit insurance/non?recourse."

First of all, we work with several recourse factors who won't charge you for credit insurance. Before we talk about that, though, I want you to consider that companies that were selling to Federated department stores before they went Chapter XI said the same thing — they figured they were selling to an AAA customer and they would never have been a problem. Then there's Macy's, Ames, Carter Hawley Hale, Leslie Fay and Phar—Mor. These days, even the largest companies can go out of business, or reorganize under Chapter XI. And often it can happen with very little advance warning.

6) "Factoring is too expensive."

When analyzing the cost of factoring, you must consider the savings you can realize internally because of factoring, along with the increased profit you'll earn on the additional sales factoring will allow you to achieve. First, by factoring you will save money on bad debt, personnel and purchases (if vendor discounts are offered). Those items alone may completely offset the cost of factoring. However, if you believe you can increase your sales by factoring, you must look at how much incremental profit you will generate from the additional sales. This should make the cost of factoring look insignificant.

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