Full-Service vs. Funding-Only Factors, The Choice Is Clear!

By: Ken Walsleben
Date: 3/1/2008

Recently a reader posed a question that, on its face, seemed simple enough. My questioner asked "what is a full-service factor, and what is a funding-only factor?" As I pondered her question, I realized that there was far more to explain than she likely expected.

Those of you considering factoring to finance the growth of your business may not realize that you have one very basic choice to make at the onset of your search. Initially, you must decide what type of factor you wish to engage. As their name implies, full-service factors provide more than funding. Some add payroll processing to their mix, others add invoice rendering, or tax remittance, or even accounting services. Still others offer all these things with the temping suggestion that you should leave your entire back office to their control while you simply focus on sales and staff recruiting.

Understandably, the full-service solution sounds attractive to many, and can be effective for some. But I must warn you to be aware of the unintended consequences of such a decision. Quite often, I am approached by folks who wish they could reconsider that decision. They chose a full-service provider, but in practice, found that turning over control of their back-office separated them from control of their company. A heavy-handed back office provider causes a great deal of grief! If payroll problems arise (don't they always?), to whom will your employees first turn? You, of course! But you won't have the immediate answer they deserve, nor will you have the ability to solve their problem on your own.

What about client contact and communication? Who will your client call to discuss invoice irregularities or concerns? And will you be able to help them directly, or simply defer to your back-office provider?

If this decade has taught us anything, it is that trendy outsourcing can initially save money, but if not done correctly, it can be a client-losing, employee-angering, unmitigated disaster!

So think twice before choosing to go this route.

By comparison, funding-only factors suffer an identity crisis. The name for their category sounds like you're only getting funding. However, what you gain from this alternative is Control! It's your business after all, so why entrust it to the control of another company? Fundingonly providers typically offer a lower-cost solution because theirs is not loaded down with extra services you already provide in your present back-office. A fundingonly factor provides needed funding and then gets out of your way. When a billing inquiry arrives from a client, or an employee raises a payroll concern, the solution is at your fingertips, and can be solved in the fashion and on the timeframe of your choosing. No more equivocating!

Most industry professionals find the allure of a 'fullservice' solution to be very tempting. In theory the arguments sound solid. In practice however, users typically find that they still must spend a significant portion of their time dealing with exceptions. This attention robbing effort defeats one of the main reasons to pursue the full service option. Instead, users eventually come to realize that their factor's desire to provide back-office services isn't about the delivery of needed assistance. Rather, it's the ever-increasing need of the funder to exert control over their funding and to minimize their risk to your business. There's no altruism here. Full-service factors control your back-office to minimize their risk profile. They then package this structure as a way for you to avoid the perceived hassles of daily back-office complications.

My recommendation? Understand that back-office development is a legitimate cost of running your business. Rather than be tempted by promises of worry-free corporate growth, seize the initiative and pursue the best factoring-only deal you can find. In the long run, that's the best way to grow your company and maintain control of your corporate destiny.

Ken Walsleben is the Principle and Co-Owner of The Hamilton Group. He can be contacted at 800.351.3066 or by email at ken@hamiltongroup.net.