Factoring is an industry with a ton of customers and a bad reputation. Plenty of industries are seen as necessary evils—my own marketing and advertising is often painted as a pile of propagandists and liars. On our wall at Modo Modo Agency we proudly proclaim that we ‘don’t think like agency people…we think like business people.’ When I spoke to Eyal Lifshitz, the CEO of BlueVine, he similarly said we’re trying to ‘reinvent factoring’ and be more transparent to help people thrive when using a factoring solution. They are trying to be the factoring company that is unlike a typical factor.
Lifshitz and I found ourselves on the phone because he took exception to a column I wrote suggesting that factoring could restrict a company’s growth by compromising their balance sheet and cutting off other sources of capital. He has an interesting take on how factoring can benefit early stage entrepreneurs—if they are educated on the terms of their factor relationships.
Is your business desperate for cash?
Factoring in the past has gotten a bad name by being seen as predatory. If you listen to news radio you are likely exposed to a factoring or business loan commercial hourly. In the commercial, a business owner had a huge opportunity, but no cash and no time to find the cash. But, by calling a number, they had $50,000 in their account the following Monday and their growth projections are finally rosy. Man…you get a factoring solution together with an advertising agency and it is all rainbows.
The challenge—and the reason factors get a bad name—is when an entrepreneur is terrible at managing their money and the temporary cash infusion from a factor is only a band-aid to an ongoing problem. It’s a payday loan for a business in these cases. And while these situations exist, Lifshitz points out that there are tons of entrepreneurs that aren’t over a barrel at all…they are simply out of 'early funding options.' He wants people to know that factoring is not just for companies that are in distress or with bad credit.
Is your business in serious need of cash?
As Lifshitz points out, there are many entrepreneurs that due to the size of their current receivables or the newness of their business (and corresponding lack of historical financial records for a lender to assess risk) simply cannot go the traditional route to funding. Among these are businesses with under $1M in revenue, businesses that need less than $250,000 or business that have been in business for a year or less. Without that financial history, or without needs of that size, an entrepreneur simply doesn’t fit into the consideration model of a traditional lender.
This is where factors have flexibility because that traditional lenders do not. They may assess your supporting documentation differently. They may take a chance on you where a traditional lender simply cannot—because of compliance and risk management standards they are held to. The cost of this capital is, of course, higher than traditional loans, but if you are serious about your needs—and managing your capital well—the cost may be justified if you don’t have other cash options. Or your other options may not come through quickly enough to keep you in a cash positive state.
Where are the gotchas in the costs of factoring?
BlueVine tries to help educate entrepreneurs on how different factoring solutions work. The areas that Lifshitz points out that can be risky are:
- Contract time and penalties. Some factors can lock in a business for a long period of time. If you’re obligated to a lender for a long window and your payors’ default, you could be subjected to further penalties. You could find yourself in a situation where you paid a premium for early cash, have to pay back cash that the factor never received and pay penalties on that exchange. No one wants to pay twice or three times for money they didn’t receive.
- Escrow accounts. How much must be held in reserve? How much are you paying for an escrow you can’t touch?
- All or nothing contracts. Some factors require you to process all payments through them, or all of a particular client through them, once you sign on. This is how they protect or guarantee their fees. Determine how much flexibility you have to pick and choose what you factor based on how high risk or slow pay it may be. Similarly some factors have a ‘minimum value.’ You may only need a short infusion of capital on a few invoices but commit yourself to factoring a larger amount of invoices—and paying a higher amount from this cash—even though you might not have needed funding assistance.
- Special fees. Some factors, in addition to advancing you funds, will charge you for credit checks, due diligence and other activities to satisfy them with your risk. If you can engage with someone that pays their own costs of the risk of doing business with you...do so.
So…are you desperate or serious?
There are plenty of stories of those that regret having factored their invoices. If you can’t manage cash well, finding ways to pay more for fast capital is not a long-term growth plan. But there are some success stories in those that factor—and have access to other sources for capital. Lifshitz references several of his clients who have doubled the amount they are factoring in the time they’ve been clients—which to him says that the client was enabled to keep operating and double their receivables. Several of BlueVine’s clients have been featured on ABC’s Shark Tank and are using factoring to help them survive the early stage. These companies are on the way up, not on the way out.
At the end of the day, factoring isn’t for everyone. It costs more than traditional methods, but for many it is the only solution—because factors are the only people that will bet on them. Entrepreneurs are known to have a healthy appetite for risk. Factors are the guys that are designed to stomach—and get paid—to seriously take that risk with you.
