And that’s when I love the response when someone asks me about the cost of factoring … but gives little or no thought to the value added benefits of it.

 Actually? I don’t love it because making good business decisions is – or should be – a process of comparisons with the question being: Which avenue leads my business to the most profits with the least amount of risk and the least amount of liability? End …

That said: If you added a compenent or complimentary service to your existing products or services that would add 10 – 20 – 100% to your sales and increase your profit margins by those or double those numbers BUT would only increase your variable costs 2 – 5% would you use that component or add that complementary service?

When I ask this question guess what most business owners and advisors respond with? “I’d have to be insane not to do that … “ So tell me something, before the men with the white coats arrive: If factoring will provide the benefits above … Why are we so fixated on it ”costing too much?”

The answer is easy and so I’m told it goes back to the 15th Century when children were indoctrinated to be good servants of the Czars and Royalties of Europe.

That teaching process carries over to our thought process about financing: We’re entitled to borrow cheap money …. and you should never look at money as a component of manufacturing even if it means that it doubles or triples your sales and your profits! Right?

That said: When isn’t the cost of factoring your receivables too high?

My rule of thumb is that this number comes into effect when the cost of the money exceeds the percentage of your budget that your fixed costs take. And remember … this is just a rule of thumb.

The reason I say this is that so long as the contribution to margin i.e. the net benefit to the profit margin is going to grow with increased sales then the cost of the money is irrelevant not withstanding that we want to get that money for the lowest cost … unless of course we are turning away sales, disappointing customers, or ruining our credit by not paying our bills in a timely manner.

From here the question becomes when and how long does it take us to get the money to finance our business?

If you think that I don’t meet people every day that are not completing sales because they are ‘searching’ for low cost money you’re kidding yourself. My question? Why not fill the sales using my money and take a slightly reduced profit but build customer rapport and brand your product … and too: Search for your cheap money.

Consider this: Isn’t it easier to access cheaper money when you can show successful sales fulfillment and profits than going on the premise “If you lend me the money now my customers will buy my product later!”? I know one thing: The bank is not apt to swallow this line … not in today’s market!

In closing, whether it’s this question or something else: Remember to do a comparison of the costs, the benefits, and the risks … but only if you want to stay in business!

What should you ask about?

• Pricing?
• How much they’ll advance you on your invoices?
• Are they private, boutique, or a national presence?
• Are they promising you more than they will or can deliver?

Stop right there and read the following:

• Pricing and how much factoring actually costs are not always related
• Availability and how much they say they’ll advance … are not related
• How big they are means little BUT the bigger they are usually the less flexilibilty they’ll allow
• Promises and what is written in the contract are two different horses so don’t fall for that one

Some questions you do need to ask:

• What is the factor’s credit criteria i.e. what invoices will they actually buy?
• Regarding the advance: All factors say they will ”advance UP TO” a percentage of the invoice … ask and get that explained!
• Regarding their size and policies: Are they flexible or strictly ‘by the book’ with their contracts?
• If they promise flexibility get it in writing … don’t find out the hard way that this was just a sales pitch!

When I factored several of my businesses before and after I got into the business itself I asked for, and alwasy provide, a heart to heart conversation about how in my case, me, and in this case, you, would become bankable.

Face it: You probably don’t want to be factoring forever so what is the prognosis and path forward to achieve bankability? Make sure the factor or source you use discusses this with you because it’s important to your business.

To help you we provide “Ten Questions You Should Ask About Factoring” on our website with no strings attached. We believe information and education are key to people trusting our services and that when they are ready to act they’ll remember us.

That said: If you have any questions please post them and we’ll do our best to promptly answer them!

Yours in business, 

             Ernie Brown @ www.finance-manager.com or email me @ ebrown@finance-manager.com

The term “debtor factoring” refers to your selling accounts receivable of companies that bought your product and in so doing are obligated to pay you … and in no short terms: They are now a debtor to your company. This is not a negative and face it we all want to make the sun shine and call them a customer but the reality is that if you sold them goods or services on open terms and you are waiting to get paid then they are a debtor too.  If you disagree then please tell me what you are going to do if they don’t pay you and if you are going to tell me that you are not going to send them to collection and/or sue them please let me know your name, your company, and what you sell because I know some people that will buy as much of your product as they can get their hands on!

Along that line an often over looked value added service the factoring company brings to the table is credit protection and credit insurance … as well as in some cases a broad depth of business advisory experience. After all: Who else know more about growing a business without borrowing than a factor?

The real beauty here is that with the factor providing the credit work a business owner can sell on an unlimited basis and still run their business on nearly a COD basis. How? As fast as the owner sells the factor, if the credit of the customers is solid, will convert invoices to cash in days if not hours.

Does this cost? Compared to a bank loan yes but I want to ask: What happens when your sales grow past the capacity of your bank line? Most likely the sales stop and now you are losing profits as in “leaving them in the street” … So I ask: How much does that cost?

Smart owners compare the two and if they’re in business to maximize their profits vs. borrow cheap money guess what they do? They make the appropriate decision!

Explore selling your accounts receivable:

• It doesn’t require you to have good credit because this function is based on the credit of who you sell to and not your company nor your personal credit
• Selling Accounts Receivable grows as you sell … how powerful is that when you don’t have to wait foryour money and can access when you want it vs. when your customer “feels” like paying you?
• Using this process does not require you to borrow nor does it require you to give away equity in your company

Think on the above: The process of “debtor factoring” was used by the Egyptians and it still works for the Fortune 500′s of today … so why not you or someone you know?

• Emotion based vs. Objective … or better said: Not financial or market based
• Want based vs. Need based
• Advice based from someone with little to no practical experience in business

Much of business success is intuitive HOWEVER most of it is objectively founded based on that intuition so somewhere along the line vision and logic need to blend together so …

• First off: When you are starting up you are on a “cash flow” diet … accept it and get over it!
• Second: Your resources are limited to what you have … you cannot spend “tomorrow”
• Thirdly: Grow your sales and grow your assets and collateral … or get in line for the poor farm!
• Fourth: A business without a well thought out plan has the odds stacked against it to fail – miserably!!!

A most common failure: Many business owners, right out of the gate, want to flash the BMW and the Rolex … but if it taxes the business you might lose it all. Accept this concept: When you are starting up you don’t own your business … IT OWNS YOU!

FOLKS: I’d rather be eating oatmeal … and I have and sometimes still do when it’s appropriate … and know that I can react to an opportunity vs. having to let that opportunity go by the wayside because I was frivolous with my assets. Being “lucky” isn’t just a matter of being in the right place at the right time … it’s a matter of being ready when you are in the right place at the right time. That said I always keep a bumper of working capital or that extra availability with my credit line intead of spending it but I will also admit: I’ve been to the edge of the precipice many times and probably will again … but that’s what makes being an entrpreneur all that it is and damned do I love it!

What is the secret to making it? Grit and common sense … and mostly the latter. All too often business owners are not realistic in what they envision:

• Financial: They don’t assess what they really need to make it happen
• Market: They don’t really understand the market challenges they are attempting to enter
• Business Operation: They have no clue how to run a business

Sadly: They are pationate – and then some; they are great people – and then some; but they didn’t assess what they were doing or where they were going. I call this the “SUNSET SYNDROME” … where a person envisions themselves bathing in the majesty of the sunset and trip over the sidewalk at their feet because they didn’t even assess their first step.  Think on this …

Business success for some might be a quick leap that just happens and God Bless those that come about it that way but for the majority it’s a series of baby steps and short term goals that build up and grow and suddenly you’re there. If not? Hopefully you’re still safe and sound.

Think on these things … and be careful not to fall because you’re day dreaming about where you could be instead of knowing where you are!

A new factoring client, supplying frozen and too perishable fresh goods, was scared to death that when the factor made contact with their customers to confirm their orders, that their customers would panic and think ill of them. HOWEVER, the opposite happened: Sales went up! Why?

During the process of factoring, a factor purchases invoices from their client – in this case the seafood supplier – but prior to advancing money on the invoice at the factor’s option, the factor may contact the client’s customer(s) to confirm that the product (or service, as it may be) received was of good quality and that the customer is planning on paying the invoice per the terms allotted.

The product? Fresh fish. This is unfrozen and top quality seafood, but when the factor called the customer they found that the fish being sold was “not exactly’ what the customer was ordering. The problem wasn’t the quality or condition, but was the actual size and cuts/shapes of the filets of some of the orders. It wasn’t enough to warrant refusing the shipments but it was affecting the ability to resell it. The result? The factor went back to the client, reported this and the client was able to correct customer concerns so they could get paid on the invoice.

Better yet: The supplier’s customers were thrilled that this minor problem was being solved!

When you first read this, it probably sounded like the client selling the invoice wasn’t doing a good job, right? Actually, they were. Prior to this, thirty or forty-five days would go by before the invoice was due and the, for the most part, the customers didn’t see it worth their while to argue given the problem’s size. Now, the issue was being corrected when the order was received and the existing customers actually increased their orders because of the improved quality.

This often happens. Why? Many small businesses get so busy that they don’t always get the chance to make the extra phone call to their customer just to say, “Hi, this is _________, and I’m just calling to make sure that you received our shipment and that everything is the way that we promised … or better!” Will that hit home with your customer or what?

We’d love your feedback…or if we can help you, let us know!

The most basic ways to bill for services is either through an invoice or accounts receivable. Did you know that you can get paid in 24 to 48 hours instead of waiting 30 to 45 days or more to receive payment?

Other income streams exist in all sorts of forms, including business notes, mortgage notes, lotteries, annuities, structured settlements, and others.

Do your homework! Make sure that you understand the effect of deciding to sell off an income stream; the highest payout may be the most costly in the end!