Invoice factoring?

[C-2]

They must call them ‘bottom feeders” for a reason!
Two things come to mind which I recall about factoring:
If your receivables are routinely 60-90 days out and depending upon the industry, factoring might not work for you since many factors turn those invoices back over to you for collection (and dinging your account).
Whether or not they will require a personal guaranty. In addition and beyond the personal guaranty, giving a factor a security interest in your biz is RISKY. Most security agreements allow your assets to be attached on an immediate (ex parte) basis – meaning they go to court and on the same day, gain control of your assets (as opposed to being sued in a traditional collection manner), and possibly even your business.
If you are carrying AR in the construction industry, you need to be sure of the reason for the delay in payment. Your client might be in an unrecoverable cash crunch and stretching out all their receivables, forestalling an inevitable bankruptcy filing. Or the amount gets so large they can’t repay you and you are forced to sue them. I can’t tell you how many times I work cases where it’s too late; the vendor should have been cut off, or alternative security guarantees put in place (get personal guarantees from the principals – that usually lights fires under their arses).
95% of my clients are lawyers and municipalities. I too am always cash crunching and chasing money (90-180 days out). However, I really tightened up my AR’s by identifying the AP clerks, or whoever is responsible for processing invoices, and establishing good relationships with them. Killing them with kindness, humble joking, and even a little reward like a gift certificate to Claim Jumper has proved to be the most affective manner for getting my invoices paid. Females are better at this cuz they can bs about tons of things. A $40 gift certificate goes a long way to an AR clerk who “helped” you get your invoice processed (even though they owe you the money and it’s past due in the first place). You better believe she’ll remember that gift certificte the next time an invoice from your company comes across her desk.
I used to send the collection letters, faxes, phone calls, but the problem really got better when I identified who was responsible for payment. Most of the time and as it turns out, they were just too busy or the invoice slipped thru the cracks.
If you are able, there are several small business banks in So Cal which make loans for AR problems (not straight factoring, but traditional financing products), such as Alliance Bank in Culver City. I know Alliance even makes loans to pay off judgments and tax liens.
Be very careful with any security interests or personal guarantees you give – they will bring you down in a heartbeat.

[Sportin' Wood]

Satan called and said that since he all ready owned my soul I can't sell my AR to some other deity. :crossx: Thanks to Al Gore I recieved my free of charge education in just two short hours I love the internet!
Factoring apears to be a dangerous game unless you are working with a large profit margin... I am not.
Guess I will stick with the equity line.
Thanks for the heads up guys.. You can keep them coming if anyone else has an opinion, but I made up my mind to stay away at this time.

[rivercrazy]

The problem is most banks will require personal guarantees. Typically PG's are required for all but the strongest companies (companies that reflect a long term successful business history, borrowing that is well below available collateral base, lowly leveraged with a history of reinvesting significant profit back into the company, etc)

[Old Texan]

Anyone have experience with invoice factoring?
My AR is fricking through the roof. Sure sounds like a good option to free up cash flow. Looks like I can make up a small portion of the costs with the 2% discount I can get, paying my suppliers in the 30 day. Never heard of anyone using factoring so lets hear your horror stories or other.
Ever watch the Sopranos?
Unless you have big margins, you will be lucky to break even at BEST.

[Old Texan]

The mafia invented factoring, if that tells you anything.
Is Tony Soprano in the mafia? Oh my...............

[Big Warlock]

I can't really add much to this. It is not a good sign to either your clients or your vendors when you enter the factoring game. As some have mentioned above, get serious about collections. Call the biggest creditors and get commitments from them. Date and amount of check. I would use a collection agency before going to factoring. However, a proper credit line is most likely whaat you need if you are just being slow paid (cash flow). You need to meet with clients and get them to pay within terms. Also, it helps to understand their side of the business and why they have to slow pay.
Good luck. And I really appreciate knowing there are so many good people with brains on Hot Boat! Sometimes, you have to admit, we wonder!!

[jeepinscott]

Its been mentioned already, but let me reiterate, it looks bad to your clients. They will run credit on them, call them and ask details of the contract, etc. It will be a PITA for them, not you. The factor companies are like collection agencies and will hound the PO of your client.
I look at it like a payday loan, it's a hole that starts out with cashflow, but usually ends up in bk. I was given the same advice as you received here when I considered it. I chose not to do it and watched others flounder when they did.

[Cole]

I used to manufactor clothing in the early 90's and used a factor for a few years...They charged 3% for each invoice per month....now one thing you have to understand is that 2%-3% may sound reasonable.. but that is per month!!!! So 3% per month times 12 months is 36% per year!!!!!! MY highest credit cards are more reasonable than that!!!!!
If your are running tight margins and your A/R are consistantly 30-120 days late or longer you will have to consider either build that into the cost or other meathods....for some it is the only alternative for HIGH rISK businesses ie:construction, clothing, etc.
Call chumo change That might be a good start!!!!
heck I my might even call him for some advice!!!!

[Sportin' Wood]

I can't really add much to this. It is not a good sign to either your clients or your vendors when you enter the factoring game. As some have mentioned above, get serious about collections. Call the biggest creditors and get commitments from them. Date and amount of check. I would use a collection agency before going to factoring. However, a proper credit line is most likely whaat you need if you are just being slow paid (cash flow). You need to meet with clients and get them to pay within terms. Also, it helps to understand their side of the business and why they have to slow pay.
Good luck. And I really appreciate knowing there are so many good people with brains on Hot Boat! Sometimes, you have to admit, we wonder!!
Your right, there are a few people on here that have some great input on subjects like this. Been operating for 7 years with no equity line, and its time to implement some sort of credit line. I was not too hip on the idea of factoring but needed to find out more.
I wish I was talking about a few late payers but all my clients drag ther feet. Just looking to find a way to take advantage of an additional 2% in savings from my suppliers by paying in the 30 day. Most all pay in the 60-90 day, I'm hoping to optimize profits this year as opposed to insane growth. 2% adds up quick over the course of a year.