Why aren't you factoring?

Put simply, FACTORING IS THE LEAST EXPENSIVE MONEY YOU CAN GET TO RUN YOUR BUSINESS!

This is a situation which boggles my mind. Literally hundreds of thousands of businesses in the U.S. alone could - and should - use factoring to extensively reduce their costs of money and operation, and still they dont do it. I have watched companies go into bankruptcy rather than factor. Why arent they factoring? Getting more personal, why arent YOU factoring?

And the answer I get, more than any other, is: 'We cant afford it.' (But you can afford to go out of business? Or struggle constantly with cash flow shortages?)

Now if that doesnt indicate a total misunderstanding of what factoring is and what it does...and what it costs, I cant think of anything that would do so more.

So Ill say it again: FACTORING IS THE LEAST EXPENSIVE MONEY YOU CAN GET TO RUN YOUR BUSINESS!

FACTORING PROOF

Now Ill prove it.

What is factoring? Actually, most business people are involved in factoring almost every day. They use credit cards. Visa® and Mastercard® are the worlds largest factors. However, they factor retail business. When you purchase something, using their card, the merchant immediately discounts the sales slip (invoice) to them by anywhere from 2-5% and immediately receives his money.

How would YOU factor? You sell wholesale goods or services, deliver them, then send an invoice to your customer, also sending a copy to the factor with whom you have an account.

The factor checks with your customer to ensure the invoiced goods or services have been delivered. As soon as he does that, he deducts a 'reserve,' (in case anything goes awry with your delivered goods/services), then forwards the remainder to you immediately. Just as with Visa® and Mastercard®, the factor has bought your invoice at a discount. When the invoice is collected by the factor, he deducts the agreed discount, then forwards the remainder of the reserve on that invoice to you. So youll get anywhere from 75 to 95% of your funds immediately, the remainder, minus the discount, in 30 days or so when the invoice has been collected.

THE COST OF FACTORING

So, what is your cost of money? (Heres where it gets interesting and where the major misunderstanding lies.)

Lets set up an example. Youre selling $100,000 worth of widgets to General Motors every month. You ship them, then invoice GM for the parts. Lets say youve arranged 30 day terms. You also have terms of 2.5% for 30 days with your factor, with an advance of 85%.

You send the factor a copy of the invoice at the same time you invoice GM. The factor checks with GM to ensure the widgets were delivered in good condition. He then transfers $85,000 to your account by check or wire transfer. This is usually within two days of receiving the invoice. Youve got operating money!

Thirty days later, GM pays the factor $100,000. The factor deducts $2500, then pays you $12,500. You do this 12 months out of the year.

Whats your cost of money?

In almost all cases, my prospective clients, incorrectly thinking in terms of loans, multiply the 2.5% by a factor of 12 and say, 'Thirty percent! Thats way too expensive.'

The correct answer is, of course, 2.5% if each invoice is paid within the first 30 days. (This percentage will go up incrementally with any invoices which are over, but its still FAR BELOW the current cost of borrowing from banks or getting lines of credit.)

To prove my statement, multiply your monthly sales to GM by 12. That answer is $1.2 million. Now multiply the amount you paid for each invoice by 12. That answer is $30,000. And $30,000 is 2.5% of $1.2 million.

Please tell me where, in the banking system, you can get money at 2.5%? That is, if you can get a bank loan at all in todays uncertain times.

STILL MORE FACTORING PERKS

Want more savings?

Whoever is doing your accounts receivable is costing you about $30,000 annually in salary. Its commonly accepted that in todays market, you have to double that amount to include the P&W, medical insurance, taxes and other costs. Thats $60,000, Mr. or Ms. Business Person. If you factor your accounts receivables, that cost goes away because the factor is collecting your invoices.

How about losses due to poor credit checking by your company employees who are not professionals in the field? Your factor will credit check any new customers, at no cost to you, thus radically reducing your chances of bad credit performance.

Other benefits include continuous cash flow, increased production and sales, cash for marketing plans, new equipment purchases, plant expansion, handling payroll or tax shortfalls and lowered overhead.

Next to the instant liquidity provided by factoring, the most valuable benefit is ridding your business of credit and collections (non-income producing activities) releasing you and your employees to focus full attention, energy and assets on production, marketing, sales and service.

WHY A FACTORING SPECIALIST?

Why do you need someone like CFG to assist in setting up your factoring? Simple. You want to ensure that you get the LOWEST RATES. If you go directly to a bank or factoring company, you are at their mercy. They have you over a barrel. A good factoring specialist is connected to dozens of sources for factoring. Those sources know and trust the specialist to bring them good business for which THEY pay the specialist, you dont.

Once youve proven yourself (good invoices from good companies who pay their bills promptly) a specialist can then go back in to negotiate even LOWER rates for you. Yes, this means OUR commission from the Factor is lower, but we think its good business practice. Once you see how well this works, youll be sending your friends and business contacts to that specialist. And your friends and business contacts will thank you profusely.

So I will say one last time, FACTORING IS THE LEAST EXPENSIVE MONEY YOU CAN GET TO RUN YOUR BUSINESS!

And Ill once more ask the question I began with: Why Arent YOU Factoring?

Mr. Barnes is President & General Manager of Capital Funds Group Ltd., a Canadian based consulting firm specializing in Putting Companies and Money Together. They also work with non-US companies to take them public rapidly and inexpensively, then getting them funded. Visit our Web Site Email Him