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THE TRUTH ABOUT FACTORING
Factoring is neither good nor bad; it all depends on who provides it and how you use it. In many ways factoring is a lot like venture capital; it’s most valuable to companies that need cash to grow. If your company is not profitable or growing, then neither factoring nor venture capital makes any financial sense.
Before factoring your accounts receivable you must ask yourself two questions:
1) Are you profitable? And,
2)Can you use the improved cash flow to get more profitable loads?
If you can answer YES to both questions then you may be a good candidate for factoring. First, however, you must make certain there are no other lower cost sources of capital available to you. Factoring is very expensive so it only makes sense to use the money IF you can use the money to get more profitable loads.
If you are NOT profitable and/or do NOT have access to more profitable loads, then factoring is not right for you.
Most factoring companies will not discuss these matters with you as they are encouraging you to sign their contract.
BEWARE! Factoring brokers or salesmen are not paid or motivated in any way to educate you on the do’s and don’ts of factoring. So you must educate yourself with the fundamental facts about factoring.
Most companies that end up factoring their accounts receivable do so because they have run into financial difficulties. They’ve had a bad run of luck with equipment breakdowns, rising fuel costs they struggle to pass on to their customers, sky-high insurance due to drivers with too many tickets or accidents or they’ve just been living too high on the hog and then the business takes a downturn. There is an argument you can make to use factoring to cover unexpected catastrophes; however, every company must have a “trouble account” for unexpected disasters. We all know the axiom: “It’s not if, but when.”
In these difficult times, even if you have a trouble-account, sometimes you can find yourself in a tough pinch that a slug of cash from factoring can relieve in the short term.
If you find yourself in this situation then you MUST take immediate action to restore your business to profitability and get out of factoring as quickly as possible.
FACTORING AGREEMENTS
All factoring agreements are pretty much the same in three ways: 1) the factor is going to take your accounts receivable (and all other assets if you’ll let them) as collateral for the cash they are going to give you, 2) you are going to agree to pay the factor a certain flat or stair-step rate or fee for use of the money, and 3) the factor is going to require you to personally guarantee the agreement. These three sections in a factoring agreement are pretty much sacred. Yes, your rate or fee structure is negotiable but the terms will not change. However, just about everything else is negotiable. The agreement will tell you what you must do and what the factor is going to do. Because you are the borrower they get to dictate the terms of the agreement that are going to secure them and there’s not much you can do about that.
Knowledge is Power
In today’s economy you have more financing choices than ever and that’s always good for the customer. Now you don’t have to settle for just any old factoring deal because now more than ever you have real choices. Gone are the days of settling for a factoring company that nickels and dimes you to death for every service or legally ties you up so you can’t move to a better deal. You don’t have to take their contract “tricks” and charges like paying sign-up fees or agreeing to minimum term limits with automatic renewals, minimum volume requirements or termination penalties of any kind.
Ask For More
Factoring makes the most sense when you’re growing, but what do you do when you’ve built your company to the size you want? Do you have an exit strategy?
The most important question you can ask a factoring company is, “How do I get out of this contract without paying penalties of any kind?”
Always look for a funding source that has a built-in exit strategy integrated into their program. Even better, find a finance company that offers an exit strategy that’s guaranteed to work for you!
REMINDER Never accept these business-killing clauses in your factoring agreement:
JUST SAY NO
• NO sign-up charges
• NO minimum volume
• NO minimum term or auto renewals
• NO termination penalties of any kind
If a factoring company insists on ANY of these clauses, don’t walk…RUN away!
Don’t paint youself into a corner!
JUST SAY NO!
The information contained in this publication is provided courtesy of Fair Factoring, Inc. (FairFactoring.com), an organization dedicated to promoting fair and ethical “best practices” in the factoring industry and assisting victims in finding legal remedies to abuses. Factoring companies that honor and vigorously comply with the Fair Factoring Bill of Rights are invited to join FairFactoring.com which entitles them to display the Fair Factor seal on their sales and marketing materials.
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