The Factoring Force BIG Blog

As if things weren’t murky enough on Wall Street right now the relationship between Morgan Stanley and CIT has just made things even murkier for factoring clients of CIT. (“Murky” is a great word isn’t it. “Murkier” is even better.)

Apparently, Morgan Stanley is advising CIT in its restructuring and one of the strategies is to use the credit balances provided by the assets purchased from their factoring clients to offset the equity deficiencies at CIT. In order to keep that “balance” and present a more positive balance sheet profile for shareholders, CIT has been slow to release cash to clients for the receivables that they have purchased. Consequently, clients are ending up in a tight cash squeeze.

In an article appearing in the Wall Street Journal online edition, writer Donna Childs points out the conflict that this presents for Morgan Stanley. In an effort to present a healthier financial profile for CIT, Morgan Stanley is holding back on the cash that thousands of factoring clients depend on to stay solvent. Ms. Childs points out that the practice of purchasing receivables whose value exceeds the available cash available is called conversion. The asset side of the balance sheet of the factor appears healthy when, in fact, there is still cash due to factoring clients.

The irony here is that invoice factoring exists to expedite the flow of cash to a company. In this case. it appears that Morgan Stanley and CIT have conspired to keep CIT afloat by using the assets of CIT’s clients as a life raft. It seems to me that this is unethical at the very least.

As has been the case so far in this era of bailouts, the little guy ends up footing the bill. Frankly, I don’t know what incentives CIT and Morgan could be offering factoring clients to continue in this lemming-like march to potential disaster. Factoring is about cash and moving cash faster. Looks like CIT factoring clients may have to factor the receivables from their factor. And a new industry is born!

I try and keep track of what’s going on in the receivables factoring industry by subscribing to things like Google Alerts and by plain old web surfing. Unfortunately, what I run into most frequently are self-promotional articles and blog posts all of which are essentially “An Introduction to Invoice Factoring.” Writing and distributing articles is a good way of gaining visibility online but it would be nice to see some more creative approaches to presenting the concept and the various facets of the practice of asset-based factoring.

But at least these cookie-cutter explanations present an accurate definition of receivables factoring and the basic strategies involved. The same can’t be said for the information that I read about business factoring on the website and in some distributed articles from Innuity Funding. In fact, I don’t believe that I have ever read a more erroneous explanation of factoring.

On their website, Innuity basically defines factoring as:

“…a way for businesses to sell off unpaid receipts to a collection agency so the business is able to retain a portion of the sale. Factoring usually takes place when a small business doesn’t have the time or resources to pursue a customer who does not want to pay for services rendered by your company.”

Huh?! I think when you sell off receivables to a collection agency it’s called “being turned over to collections.” And you don’t sell off your receipts. A collection agency keeps a portion of the collected amount as compensation for their services. I used to work in the grocery industry and when you had damaged product or product that was close to being ou-of-date, you sold it off for whatever you could get and wrote off the difference. We called this “salvage.”

Factoring is not salvaging. Factoring is putting your assets to work proactively and productively. It is not a fire sale on uncollectable bills.

Perhaps it is part of Innuity Funding’s strategy to misrepresent receivables factoring. I actually don’t believe that they offer factoring services. They apparently offer commercial loans and lines of-credit for businesses. If anyone was considering factoring and read the Innuity definition, they would likely run away… to a commercial loan.

A method to the madness?

So, while their are a million elementary explanations of factoring out there, Innuity’s certainly is not one of them.

Whenever I have the urge to plunge into the murky world of finance and reveal to myself how very much I don’t understand, I track down an article or press release from the UK. Oh, those British! They really know how to turn a phrase.

As I was reviewing the intriguingly titled “Epitaph for the Overdraft,”  distributed over PR Newswire, I encountered the term “overdraft facility.” Now I understand “overdraft protection” (a device which I wish that I had in place quite a few times due to my wife’s inability to keep a balanced checkbook) but I was not quite familiar with an overdraft facility. Frankly, it sounds to me like a British restroom available to those who have consumed more beer than their bladders were able to accommodate. “Excuse me gents. I must use the overdraft facilities to make a deposit. Order me another pint while I’m at me business, if you’d be so kind.”

Not quite. Apparently, an overdraft facility is a program that allows individuals or businesses a certain amount of  cash beyond what is actually available in their bank  account.  Typically, an overdraft facility is used to address cash flow issues. Apparently, the advantage over a loan is that the account holder has a specific amount of funding available but does not have to take possession of the amount and be responsible for interest on the entire amount.  These overdraft funds can be utilized in increments over time and interest is charged only on the amount utilized.

I don’t know about you but sounds like a line of credit to me.

Anyway, the whole point here is that a survey of financial advisers in the UK indicated that 80% of them stated that their clients had been refused overdraft facilities or seen the overdraft facility reduced due to tighter credit. As a result, many advisers are directing their clients to invoice factoring and invoice discounting as alternative means of financing.

A representative of SME Invoice Finance said: “Many established businesses are turning to invoice discounting for the first time. Encouragingly, advisers are seeing the critical role that invoice discounting plays…”

The CEO of the Asset Based Finance Association (ABFA), commented: “I am delighted that invoice finance is at last taking its rightful place as the first choice product for working capital funding.”

Ok, sounds like a smackdown brewing between SME and the ABFA with one obviously advocating for invoice discounting while the other is championing invoice financing.

Are you ready to rumble?

Coming soon: Invoice factoring vs. invoice discounting. What’s the difference?