Understanding the Factoring Business

With so much information readily available at our fingertips it is really easy to take shortcuts when trying to learn about the factoring industry.

Although the factoring business model is very straightforward, you still need to understand basics before you venture out into the world and meet with prospects.

One of the downsides to the factoring industry is that much of it is learned on the fly. There are association courses, books and newsletters like Factoring Investor which are very helpful if you are new to the business.

I personally know there is a huge thirst for factoring information since I published our “How to Guide for Factoring Brokers” a little over a year ago. The requests we received for the guide were overwhelming to say the least. This leads me to believe that more needs to be done on my part to educate both brokers and factors looking to enter the factoring business. Until then, below are some general guidelines that every prudent factoring broker and funder should understand.

1. Understand the Factoring Transaction

Experience has taught me that no two deals are the same even if they are within the same industry.

For example we have funded clients in the apparel industry that involved different levels of due diligence because of contract wording. In one contract our client was required to deliver their goods within a specific amount of days from the issuance of the purchase order or they would be forced to take a deduction on the invoice. As the funder this was very important to us since it could have put us in an upside down position on the invoice.

I cannot tell you how many deals we declined because of contract wording. If you are not comfortable reading contracts and feel the deal is worth the effort, have a professional review it for good measure.

2. Look At Both Sides of the Deal

So often I see factoring websites and advertisements boasting that with factoring good credit is only required by your customers. Really?

What happens if your client has terrible credit and has creditors who have filed liens on his business? Or what do you do if another secured party has a first position UCC filing?

Sure, there are numerous remedies that may work but not always. We recently declined a prospect because his credit was so poor and his business was heading in the wrong direction. For more details on this subject, see our June 2011 Factoring Investor article,
“Factoring: Is It Always About the Account Debtor?”

3. Does The Deal Make Sense?

I realize this may sound foolish, but I cannot tell you how many times there are conflicts between what the prospect says and the paperwork gathered with the application. If you cannot understand the deal flow, run it by a colleague or professional in that field who may have more experience and continue to ask questions.

These are just a few suggestions you may want to consider when you, as a factor or broker are considering funding for a new prospect. Look for our upcoming tutorials in the near future as we help you chart your course in the factoring industry.\

This article was written by our president Don D’Ambrosio and originally published in Factoring Investor on September 1, 2012

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