Which brings me to a question…most of our stores pay via credit card (or COD) when we ship (meaning they do not get terms from us). Do factoring services exist mainly for doing business with large retailers since boutiques don’t always get terms (but the big retailers demand them)?

Quick note on EDI – we were able to find a few flexible, web-based solutions that only takes several hundred dollars per client to set up and less than a dollar per EDI transmission ongoing. Most have experience working with apparel/general merchandise retailers, such as Nordstrom. However the ongoing processing/maintenance of account is crucial and will require capital/manpower.

1) At my (old) job, we were factored.

2) The contract term is probably better answered by our mutual friend, but I believe 2 years with automatic 12-month renewals thereafter is common

There seems to be a lot of confusion about what a factor does and how they do it. Let me try to clarify based on my own experience.

The factor can do 3 essential things — but each relationship is different and your factor may do one, some or all of these things, based on your needs and their own internal decisions.

1) Collect your receivables. The factor is your ‘collections agent’. Once you have generated the receivable and assigned it to the factor, they will be responsible for getting your customers to pay. The money is paid directly to the factor and then the factor remits the funds to your account, along with an accounting of where the funds came from. You may still have to make the occasional call to customer, but the vast majority of your collections work will go away when you get a factor. The factor can collect your receivables regardless of whether they are lending against them or providing credit insurance (see below)

2) Credit insurance. The factor checks credit for your customers and if the customer credit is approved, the factor will insure the receivable. In other words, if the customer does not pay you for whatever reason, the factor will make you whole. Usually a receivable has to be at least 60 days past the payment window before the factor will make good on the insurance. There are a number of requirements that have to be met in order for the insurance to be effective, so it is important to comply with the factor guidelines all the way through the process to insure that you will be covered in the event of non-payment.

3) Lending against credit-approved receivables. The factor will lend you money based on the value of credit-approved receivables you have assigned to them that they are collecting. The factor is willing to lend you the money because they are collecting your payments, so they know they will be paid first. In addition, they have checked the credit on the receivables (see 1 above) so they have a high degree of confidence that they will be paid. To protect themselves, the factor will lend you only a percentage of the total receivable value. For smaller companies this could be around 60%, but would likely increase after the factor has experience with your collections. This loan is called a DRAW. The draw is available as soon as you have signed over the receivable to the factor i.e. no 45-day waiting period as Kathleen mentions above. The factor will only lend against credit-approved receivables.

So here is the flow of how this could work, for a company that is taking the ‘full package’ of services. I’ll use the name of my old business.

1) Sacque Suit receives an order from a new account: Jimbo Retail. The order is for $20,000.00

2) Sacque gives the order and customer information to the factor, Receivables Specialists. This includes the amount of the order and the SHIP WINDOW.

3) Receivables Specialists says the credit limit for Jimbo is $10,000.

4) Sacque goes back to Jimbo and cuts the order in half. (Could also get $10,000 from Jimbo up front to eliminate risk). Assuming that Sacque ships on-time, the receivable is now insured.

5) Sacque ships Jimbo inside the delivery window and generates an invoice for $10,000.

6) Sacque signs-over the invoice to Receivables Specialists.

7) Sacque immediately draws $6,000 cash down from Receivables (60% of the 10K receivable)

Receivables reaches out to Jimbo and collects the funds

9) When Jimbo pays, Receivables pays themselves back the $6,000 (plus interest) that they lent Sacque Suit and then pays the remainder of the money to Sacque Suit.

Don’t know why a retailer would require you to be factored, but it is widely believed that factored accounts get paid by retailers faster than ‘independent’ accounts.

Given the state of the economy today, the credit insurance element of factoring has become increasingly important. It may make sense for some readers of this blog to use a factor for credit insurance and collections without borrowing. Please note, this is still going to cost you some money – the factor will take a fee that is a percentage of the value of the receivables assigned.

Finally, most factors will not restrict you from selling non-credit approved accounts. They simply wont’ lend against them or provide credit insurance for them.

Hope that all makes sense

Comments:
Our mutual friend who is a factor (the man who took you out to lunch) admitted to me that it was possible to be paid in 60-90 days as you said but that it was not typical and we all know why. Still, I’m hinging everything on the 60 day thing when I asked him why someone should be factored if they could theoretically be paid in 60 days considering that factors themselves don’t pay until 45 days. The only thing left in my mind was that factoring amounted to a very expensive two week loan, bridging the gap btwn 45-60 days. As such, factoring could be considered a tax one pays for not being prepared. Wouldn’t it be far less costly in even the short term to have it together and cover that two week gap one’s self? Because learning VCS is difficult to learn quickly and unerringly, the fees paid for factoring can also be called tuition.

Another question: What’s the contract term for factoring?

Re: factoring in general I wrote elsewhere but bears mention here. Another downside is factors want *all* your invoices, even those for which you don’t need financing (because the customer pays on time). I think all these accounts should be rolled into the decision making process.

Factoring is helpful beyond VCS etc; factors will have say so over which orders you accept. They won’t let you sell to just anybody. This is good and bad. Bad because they won’t let you sell to an untried retailer who may be up and coming themselves but who will be successful. It’s good because they won’t let you sell to a party known to not pay their bills. As such, factors are a sort of credit checking service for new lines who don’t have the means or connections to know which buyers they can risk taking orders for. But you Thomas have been around and know everybody.

I have noticed a danger tho is saying X thing is possible (or X price is possible) because the uninitiated will look at the bargain basement price and use that as the basis of their expectations. A common example is a DE who has heard some reps are only paid 8% commission (true) and then decide they will only pay 5% (that line folded before they could entice a rep to take their line). Or they’ll hear 12% and offer only 10%. Obviously there’s some correction going on if they go anywhere but as you know, I typically write about what is most common. Likewise, if their expectations aren’t met, it seems too many are too quick to write it off as a penalty one pays for being small and while that’s true sometimes, that is not so often the real reason. Most small people aren’t as prepared as larger entities because they either didn’t come into this with formidable experience (as you did Thomas, particularly in financial matters) and being small, cannot attract the human capital with the acumen needed to exact those discounts or trading preferences.

Another question: Do you (or anyone) know why some retailers *require* you to be factored?

Payment — should be between 60 days and 90 days in my experience, NOT 6-9 months. The fewer problems you have with your shipments (i.e. correct use of EDI, following procedures as listed in compliance manual) the faster you will get paid

EDI — you do NOT have to spend $50K to get EDI. I set up EDI for my business for only a few thousand dollars — I used EZCom, which is Web-based EDI interface. I had no chargebacks or issues with my EDI business with Bloomingdale’s using this system.

Doing business with department stores is complicated, but if you take the time to read the manual and comply with what you are told to do exactly how you are told to do it, then you will get paid.

Having said that, the system is not set-up for smaller players.

You will have to decide if it makes sense for your business to enter this environment that is dominated by well-capitalized companies with financial, marketing and operations resources that are not available to D-Es.

The largest factor of small to medium sized apparel businesses is a company called CIT. CIT offers a wide range of financial services beyond factoring. The firm is in very serious trouble, many in the industry have been gravely concerned that a CIT bankruptcy would put thousands of manufacturers and retailers out of business (factors also lend money to stores to buy inventory).

That said, the factoring side of CIT’s business is very profitable. Because of that, there are several parties interested in purchasing it. The long and short of it is there may be some difficulties and minimal losses if a transition were to take place but it is not likely to be as devastating to broad swathes of our industry as apparel people have supposed. More details are here.