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Some common misunderstandings about factoring

The biggest concern small business factoring prospects have is, "Oh, you're going to contact my customer? I don't want the relationship between me and my customer to be jeopardized." That's a misunderstanding because if the small business is doing well enough to be pre-qualified and then qualified enough for the factor to send a notification to their customers, these customer will think that the small business is now an established business that can afford to get financing. Any established business has to have financing. Nobody works on a cash-only basis. It just doesn't work. Customers are usually very open to the idea of factoring.

The other thing is that large corporations are used to factoring. Almost all of their vendors use factoring in one way or another. For example, a large corporation that's dealing with a large vendor, like the paint vendor Sherwin Williams, they do it all the time. They tell their customer, "Pay me in ten days, and I'll give you a two percent discount on the invoice." What are they doing? They are factoring their own invoices. Large corporations are used to dealing with that.

How it works is that the factoring company sends out a professional letter to the customer, with the client's knowledge and participation to notify the customer of the factoring arrangement. That letter looks like it's coming from the client. The factor puts the client's letterhead on the "Notification of Sale" and asks the client to sign it and send it to their customer.  The factor will not talk to the customer unless and until they have acknowledged that letter so the factor knows that they're aware of their relationship with the client. It’s all handled in a very courteous fashion to make sure that the customer is aware that all work is being performed by the client, just like it always has. Any quality issues, they are still dealing with the client. Any other issues, they're still dealing with the client. The only thing they have to do is write the check the factoring company.

It’s similar to a company using a payroll service to pay their employees.  The check may come from somewhere else, but nothing has changed.  In factoring, the small business is using a factoring company to handle their accounts receivable processing. That's pretty much what it is. Most clients explain it that way to their customers. It works very well.

Customers are going to be more than happy to help out their vendor because they need that small guy to do the work. The small guy can't continue to do the work unless he's got some cash in hand.

This can actually be beneficial to the small business.  Instead of having to constantly nag his customers to pay, they can get paid quickly by the factor and concentrate on getting the work done.  Usually, large customers don't appreciate vendors coming to them constantly doing collections, so to speak, on every single invoice as soon as it gets past 30 days. Factoring companies aren’t going to do that.   Normally, a factoring company won't go into collections unless and until the client is not communicating with them. If the client is communicating and working with their, they will continue to work with them and try not to interfere with their relationship with the customer. The customer is not the factor’s client. They are just the factor’s debtor. The client is the one the factoring company is working with.

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