Finding the right factor.

As factoring becomes more and more widely used and sought after, more and more factoring companies are popping up. So, how do you find the right one that works best for your company's needs and specializes in your industry?

You could apply to multiple factors and see who works best. While the paperwork for applying with a factoring company is relatively small compared to the typical stack of forms and proof of credit you might find when applying for a loan, it can become rather tedious to fill out each of the different types of forms from each of the factors. Luckily, most of them require the same types of information so the tedium is made up mainly of duplication.

It's a good idea to do some background checking on the factor or factors to get an idea of how established they are and how diverse or specialized they are. Ultimately, a factor is a company or entity that has money which it is willing to purchase invoices with. Factors typically fall into certain brackets such as the amount of money they are willing to pay for invoices and what types of businesses they will purchase those invoices from. There is generally NOT a one stop shop as far as factors go.

Another thing to keep in mind is what type of factoring the company performs. Ideally, you want to find a factoring compnay that will use a non-recourse contract as opposed to a recourse contract. A recourse contract means that if the person or company that owes on the invoice doesn't pay, the factor will then look to the company that sold the invoice to pay for the balance. As a company trying to keep it's doors open or expand, this can be devistating. Imagine that you get your money from the factor and then proceed to pay the bills, your workers, investments and so forth when a month or two down the road, the factor is knocking at the door expecting payment on an invoice that your client didn't pay in full.

The upside to recourse factoring is that the money may be obtained a little faster and possibly at a higher amount.

The downside to recourse factoring is that you may have to pay on the invoice you sold if the client that originally owed on it does not pay.

The upside to non-recourse factoring is that you don't have to worry about the invoices once they are sold. The factor has already assessed the clients that owe on those invoices and pays for the portion that it feels is worth the calculated risk.

The downside to non-recourse factoring is that the factor may not pay out as much for the invoice. In other words, the invoices may be discounted more so than with a recourse contract.

However, there is another upside to non-recourse factoring. Since the key part of this type of factoring is the risk that the factor takes, as the invoices are paid, the risk factor goes down and the factor will typically discount the invoices less and less over time. What this means is that not only do you not have to worry about the invoices once they are purchased, once the clients are established as good paying clients, you will maximize on the amount of money the factor pays out on the invoice.

As a note, the risk that the factor guages is based on the client that owes on the invoice. Sometimes, the risk may be viewed as low at the very beginning if, for example, the client that owes on the invoice is already well established. If Medicaid or Motorola is the client that owes on the invoice, it is pretty well known that those companies pay their bills. Also, if the client is one that has already been established with the factor itself, the risk could be considered low.

Let's take a look at a real world example. Let's say that I owe you money because as your long time friend, you feel comfortable loaning me some cash so I can buy some sneakers that I wanted. I was a little short and couldn't wait to buy them, so you gave me the cash I needed to get those sneakers before they got pulled from the shelf. It is going to be next month before I can pay you back. A week after you loaned me the money, you realize your light bill is due and if you could get at least 80% of the money, you could pay your bill and avoid a late penalty. You have another friend who could buy my debt for 80% of what I owe you. Here is the catch. He doesn't know me very well and doesn't feel confident that I would pay what I owe. I can't say I would blame him.

Now, imagine if the person that owed you that money back was Donald Trump. The Don is pretty popular and is well known to be a financial bigshot. Your other friend would not think twice on buying up Donald's debt to you.

Now, for that example we need to suspend reality a little bit, because why would Donald Trump need to borrow money from you to buy a pair of shoes? But, I think you get the point.

So, as a company looking for the right factor, you could do a lot of research, apply to a lot of factors, try to weigh out the pitfalls of the type of contract that is being used and eventually find the right factor or possibly just give up.

OR

You could use a factoring broker or specialist. Let these guys do the legwork of finding the best factor for your company's needs. A factoring broker or specialist often is affiliated with a large number of well established factoring companies. Much of the legwork has already been done and the right factor can be matched to your needs fairly quickly.

If you would like to leave the dirty work to the specialists and benefit from a huge pool of well established factors, please feel free to contact me and I will be happy to assist you.

Anthony Hall
Agent ID# 4735-6246B
ahall@bpmc.us
919.225.0188