The Factoring Force BIG Blog

I have always perceived members of the factoring industry as generally honest lot. But apparently, if the opportunity to take advantage of a circumstance involving he exchange of money is present, there is a dark heart just waiting to pounce.

Factoring receivables is becoming a more popular means of generating capital or improving cash flow and as more factoring transactions take place, more opportunities to abuse the system are devised. That is what officials are warning businesses about in Birmingham, England anyway.

The scheme is actually pretty simple. A factor is engaged and systems established to move receivables to the factor in exchange for the cash value of the receivables less the factor’s fee. The factor must then wait tro collect the balances on these receivables.

What the “bad guys” do is to create what are known as “fresh air” invoices (leave it to those Brits to come up with such a descriptive moniker), which are really dummy invoices for companies that don’t exist or for products that were not actually sold. The factor unknowingly provides cash for these invoices but then cannot collect. The directors of the company are normally liable for all the amounts due to the debtor and someone within the cpmpany skims off the cas that the factor provided.

Or, entire companies can use the fraudulent “fresh air” invoice method to defraud factoring companies. It takes a fairly complex system of deception which I won’t even bother to describe here. Suffice it to say, it’s kind of like an in-house Ponzi scheme.

Oh well, the image I have of the squeaky clean factoring indistry is shattered. But wait! Maybe this is a strictly British problem. Maybe the U.S. factoring industry is squeaky clean after all. Maybe I’ll just stop reading the news so I don’t read anything that might disappoint me.

Factoring assets. Factoring Invoices. Factoring receivables. No matter what you call it, those involved represent all that’s good and pure and virtuous about the financial industry. At least compared to those slimeballs involved in mortgage backed derivatives.

Whenever I am reading about the advantage and disadvantages of invoice factoring, one of the first negatives mentioned is the expense. Of course, the alternative being considered is normally some sort of loan and the comparison is invoice factoring vs. a business loan.

Ozark Capital has published an article addressing this topic and the author makes a pretty good case for the advantages of factoring. But one of the premises that I find a bit disconcerting is that the author seems to take the position that a business loan is preferable to invoice factoring because he/she states that factoring is something to be strongly considered after a business owner has been turned down for a business loan. I would like to do a post in the near fiyure that compares the actual out-of-pocket costs for these two methods of financing.

One intriguing position in the article presents a scenario where it is actually a financial disadvantage to avoid invoice factoring. The author refers to this as “incremental profit analysis” and measures the cost of factoring vs. the financial opportunity missed by not factoring. Very good point!

They don’t mess around Down Under. (Actually, I’m not sure if New Zealand is considered Down Under. If I’ve offended any New Zealanders or Aussies I apologize.) I read a newspaper article today in which a car repair shop in New Zealand threatened to send gang members to collect on a debt if a certain customer did not pay up.

Actually, he did not threaten to just send a bunch of thugs to the customer’s house. he threatened to sell the debt to some unsavory characters. Said the repair shop owner, “If he had just paid his bill it would not have come to this. I’ve done nothing illegal. It’s called ‘factoring’. The article then went on to explain exactly what invoice factoring was so the unenlightened would become enlightened.

I found this really comical. I’m sure that many readers were hearing about invoice factoring for the first time. And their introduction to the practice is to read a description of an invoice being sold to a “factor” that is a group of thugs that likely includes kneecapping in their collection techniques.

Hmmm. I guess this falls into the category of “notification factoring.”

It’s time once again for the “Invoice Factoring Video Roundup!” Yee Hah!!

We have scoured the Internet (actually we spent about 36 seconds on YouTube) looking for the finest representations of the asset factoring industry presented in video format. Our winner this week is “Platinum Funding Group” for their scintillating video presentation of a company press release in January of 2008.

Company spokesperson, Daniella, a business development officer, presents the release about a series of information and networking events planned by the company. My two favorite parts are the mesmerizing details about the neo-gothic design elements of the Bush Tower in NY followed closely by the production crew loudly turning the page on the flip chart which Daniella (an attractive trouper) is using as a teleprompter.

Seriously, I know that it is effective optimization to include video as part of your online marketing mix. But every now and then we need to remind ourselves that potential clients or existing clients may actually see this stuff. Factoring companies are sometimes lumped into the same category as payday loan companies by the allegedly more sophisticated members of the financial industry elite (many of whom are either unemployed or in the process of being bailed out by generous Democrats). We should look and act the part of the sophisticated international industry that we represent.

Plus, dammit, we’re making money. So lets look the part.

Accounts receivable factoring seems like a pretty basic concept if you just read an introductory article about the concept and practice. Basically, for a small percentage, an individual or company advances you the cash due from your receivables. The factor makes money on the transaction by collecting more than they advanced and the recipient company receives cash possibly months before they would have received it if they had waited for payment.

But it’s just not that simple.

If you want to gain some insights into the process and the potential advantages of factoring, Ozark Capital Funding has prepared an E-book that presents some of the ins-and-outs of factoring. Unfortunately, I can’t tell you how to order it or what it costs. The E-book, titled “Accelerate Your Cash Flow With Invoice Factoring,” is being promoted on the OCF website blog but there is no purchase information although, apparently, you will be able to purchase the book through Paypal.

I’ll tell you more when I have had a chance to gain access to the book and review it.

I have seen a lot of info online about invoice factoring but most of it is promotional and sales oriented. But today I came across an article in a regional mainstream business publication which indicates to me that more businesses are starting to discover accounts receivable factoring and the benefits of this approach in a tough economy with tight credit.

An article in the Central Penn Business Journal describes the growth in interest about factoring as a financing option by focusing on the experience of Sentinel Funding Services in Dauphin County, PA. Seems the company has experienced a surge in inquiries as business loans have become more difficult to obtain and many smaller firms experience cash flow squeeze.

The freight and medical industries have known this for quite a while. Now, everyone wants into the act.

I like to cruise around on YouTube later at night when things have settled down and I want to chill out. My favorite thing to do is look for live performances by musical groups from my younger days. That would be back in the heyday of progressive rock in the 1960s and ’70s. I am forever discovering groups and songs that I had forgotten about and I just sit there and get nostalgic for the good ol’ days.

One thing that amazes me about YouTube is how much other information there is on there besides music videos and silly people trying to become famous doing silly things. For example, I looked up the term “freight factoring” and found dozens of promotional videos for factoring companies. What I was hoping to find was some sort of straightforward information on the do’s and don’ts of freight factoring but I found a lot of slick sales videos instead.

But I wanted to post a video and I figured I’d give a plug to a guy with an entrepreneurial spirit by the name of Jack Martin. Jack runs a business called A1 Freight Broker Training and is aggressively using vehicles like YouTube to promote his business. Below is Jack’s brief video referring to freight factoring. Keep on truckin’, Jack!

I came across an article in a UK publication by the Federation of Small Businesses that does an excellent job of walking a prospective candidate for factoring invoices through the process. The author takes a step-by-step approach and cautions the readers to make a case to the factoring agents that positions their company as viable in the long term. Any indication that the use of factoring invoices is a desperation move to keep the company afloat will put the client in a poor negotiating position.

The article goes on to explain that a business owner should definitely negotiate a rate that is acceptable and never to take the first offer. It is advice that recommends a level-headed approach and is definitely worth reading even though the target audience is in the UK. The basic principles of invoice factoring still apply.