ADHD dump: factoring 2

Posted by Kathleen Fasanella on Oct 29, 2007 at 12:06 pm / Operations, Sales and Marketing / Trackback

In response to Kathleen’s entry, I wonder if the DE has an accountant. This is typically one of those areas where business owners “think” and “consider” when, in reality, someone needs to crunch numbers and see if it makes sense. Typically financial matters are easily decided with analysis. She should have enough information on past collection patterns to determine which accounts she should factor, even factoring in the potential loss from non-recourse factoring (factor or not, some bad accounts just never pay and usually any business with receivables has a percentage that are never collected).

About the factor issue: even though the percentage they charge can be substantial, there is the concept of the “opportunity cost” of financing someone without collecting interest. Even though a business owner doesn’t have a direct expense to pay when offering terms (vs. factoring), there is an opportunity cost associated with having a long receivables cycle. The calculations for determining the cost of such is typically pretty easily calculated and are usually based on the prevailing interest rate a business would pay to borrow that same sum of money. The concept is that whether you charged somebody interest or not, that money is still worth interest (and if not that, could be used for other things). Payment terms, essentially, allow a customer to borrow money without paying interest.


I say this to point out that a lot of DEs will say “I don’t want to pay a factor” because they don’t want an expense. The truth is that even though you don’t write a check, there is a cost associated with fronting the money for production and waiting 30-90 days or more, after shipping, to be paid by the customer. A DE could potentially be looking at a 90-180 day cycle from when they pay the expenses of production to when they receive payment from the retailer, even without department store accounts. And I think the general concept of not financing means that a lot of businesses could (and do) get in a cash flow crunch, and many have the type of product where they actually should factor and should build in the costs into their business model.

The truth is, a lot of small businesses need cash flow assistance, even when they have the greatest product and the greatest sales rep and the greatest everything else. Many small businesses resort to credit cards and other high interest rate financing. Many have to finance outside of the business (i.e. using the equity in their home or other assets). Even though being 100% non-debt self financed is an ideal goal, for many businesses, it’s not feasible.

One Response to “ADHD dump: factoring 2”

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Rocio
October 29th, 2007
10:11 PM

Hmmm….

This struck a cord with me today because I have a new client who is launching his first collection and was “adviced by his factors” to look for business partners that are willing to extend payment terms.

My answer to him was that since his factors were so willing to give advice about convincing other businesses to extend interest free credit, they should be the first ones to put it to practice

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