So What's The Deal With Factoring Anyway?

By: Ken Walsleben
Date: 11/1/2007

Have you noticed that your industry seems really popular with factors? It seems like wherever you turn, there's a factor touting their service. It's not your imagination. I can confirm this phenomenon, and I'd like to explain why and what you can do about it (i.e., take advantage!).

Temporary staffing firms have historically been a great match with factors. In recent years a number of factoring firms have also begun to covet placement firms as well. Factors benefit because your industry routinely works with credit-worthy customers, you often grow quickly, and your invoices rarely result in trade disputes. So long as you stay current with the taxman, and produce signed time sheets, factors consider your business to be rather routine and 'low-maintenance'.

From the user's perspective, factoring can be a blessing from above. That's because more than most industries, staffing and placement have an inherent cash flow problem in their business model. Like security guard firms and custodial firms, practitioners in your industry have an extremely high proportion of labor expense to other types of cost. More so than any other form of expense, labor MUST be paid timely and frequently. Yet unfortunately, customers don't pay your invoices with the same speed. Thus, the cash flow dilemma.

Another reason factors are popular to your industry is that factors will normally work with emerging firms that are not yet attractive to traditional lenders such as banks, and factors don't routinely impose tight credit-line caps like other lenders. Hence, factors provide a scalable growth mechanism that will grow with you and not retard your firm's inherent growth opportunities.

As a result of these attributes a mutual love affair commenced long ago. So?

Well, remember your Economics 101 course from school! Your first lesson was that imbalances between supply and demand have a big impact on costs of product or service. You are now in the enviable situation of being 'popular' and having many factoring options to choose amongst. Due to the high number of factoring firms that covet your business, you are now benefiting from aggressive price discounting and structural enhancements amongst those competing factors.

So how to take advantage? Certainly, price is a strong consideration, but I want to enlighten you to some of the other issues that can be negotiated. These criteria can help to separate the best from the rest.

Find out if the factor requires term agreements or volume requirements. Can you obtain better pricing by offering these in the first place, or adjusting them from the factor's initial proposal? Does the factor require you to factor all invoices (bad) or just some (good)? Can you age invoices prior to factoring to reduce fees (good) or must all invoices  be factored immediately after creation (bad)? Does the factor pro-rate their fees to reflect quick customer payments (good), or must you endure a one-price-fits-all approach with minimum 30 day fees (bad)? Does the factor utilize batch accounting (bad) or the more preferable individual invoice accounting (good)?

How do your non-factored receipts get handled? Does the factor immediately return them (good) or place them in your reserve escrow account (bad)? Do transactional fees stop accruing immediately upon receipt of payment by the factor (good), or after a check clearance delay (bad)? Does the factor allow you to control invoicing (good), or do they require control (bad)? Do your reserve payments get released immediately (good), or monthly (bad)? Does the factor require invoice repurchase at 60 days (bad) or 120 days (good)? Does the factor require your personal guaranty (bad) or is this unnecessary (good)? Is the factor's program full-recourse (bad) or non-recourse (good)?

These are just some of the criteria that you can discuss and structure with a factor. No two factors do business identically. But given your continuing popularity, you can bet that most of these criteria can be addressed and negotiated to your advantage. You just have to know to ask. Don't limit your discussion only to rates. As you can see, until you know the answers to these many criteria, rates can't be properly compared.

If any of these terms or comparisons require more explanation, let me know. I'd be glad to explain. Email me at ken@hamiltongroup. net or call me at 800.351.3066.