It’s not often that I get bested in an argument, at least to the extent that I’m willing to admit it, but it did just happen this last week over on AVC, one of my favorite technology blogs.
In a post about business funding, the author, venture capitalist Fred Wilson, and a commenter, Carl J. Mistlebauer, vented against a financing alternative known as factoring, which is a service that my company, TempWorks, provides with our payroll funding division.
Wilson referred to companies that use factoring as “shaky,” which, coming from a venture capitalist whose success is predicated upon getting one big winner while putting a bullet in the head of 10 others, is more than a little odd.
I shot back, “Fred, factoring is not just for the ‘shaky’. We factor some 35 high-growth temporary staffing companies, providing them software, career sites, marketing, and payroll processing to fuel growth.
Our clients are winning because they focus on sales and recruitment instead of all the bookkeeping and cash flow worries that keep their competitors at bay.”
Separately, Mistlebauer followed up Wilson’s post with this comment: “Sadly, factoring once was a smart business decision, but nowadays, even the big names in factoring, such as CIT, have become shady operations.”
Oh, the indignation. So not only are my clients “shaky,” but now this: I’m “shady.” Nothing gets the hair on my red neck to stand up faster than somebody being wrong on the Internet.
I fired back:
I didn’t realize who I was messing with. It turns out that Mistlebauer wasn’t some snarky commenter. He keeps a great blog and sports a financing pedigree longer than a fiber optic cable. And he replied back with a lot of great information about how murky things get when a factor gets involved with a major retailer like Walmart.
It was quite a lesson that I’ll try to share in another post since this one is getting so long. But I’ll share here one zinger he offered:
Yes, and there used to be banks that would loan businesses money! In fact for 25 years I had a line of credit with my bank, never really used it but it was there. Then in 2008 they pulled my line and when I went back to re establish the line they wanted 100% collateral as security, and not my business’ receivables or inventory but my personal home. I have over 200 retail customers who have been customers for a decade or so, and over half of them had their revolving credit lines pulled.
A welcome insight, Carl. There’s a reason we remember so well Shakespeare’s missive, “Neither a borrower nor a lender be.” Financing is a tough business to do right whether you’re a factor or a bank.
{ 7 comments… read them below or add one }
Gregg,
Having depended on factoring for 20 plus years I think that the reality is that factors have lost sight of what the true service is that their clients depend on them for.
Most small companies need access to their funds immediately to grow their business, but they need access to quality funds. By that I mean that they need to rely on factors not only for funds but also for credit approvals and collections.
I was a big fan of factors for many years, because they provided a service that we were not good at, which is credit decisions and collections and by outsourcing these duties we could focus on what we do well.
If you are just giving me an advance on my invoices then that is not much more than a payday loan business. Most small and or starting out businesses are desperate for customers and they make some really poor decisions in regards to credit and they do not want to anger a customer by demanding payment and thus factoring CAN provide a much needed discipline and can provide a value added service necessary to grow ones business.
But the reality is, if you do not understand factoring, then you can get in way over your head in a very short time. If you provide true value added service then congratulations! But, for the most part, most factors are just in the money lending business, not the service business….and I think that is a shame.
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Hi Carl
We see several payroll factors come and go from the staffing space every year, so your argument that what we call money-only factoring is as shaky as a payday loan operation makes a lot of sense.
I did however pass around your comments to one of our socially meek sales team members who had this to say about your comment:
He talks about lack of service. In the staffing industry, many companies still/only exist because of the life life tossed to them by their factor. True, it is often to keep them healthy long enough so the factor can be made whole on a loss, but rare is when a lender doesn’t help a decent guy who had some bad luck/bad account
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Carl, while I see your point I must disagree with the lack of service factors provide. I have been in the business of factoring receivables for staffing companies for more than 15 years and every company I have worked for has gone above and beyond what they are contractually bound to do for their customers. Maybe it’s pure coincidence or maybe it’s just the staffing industry, but so often it has been the factor that has tossed the life line to save a financially troubled company. As far as a companies easily getting in over their head due to their lender, I disagree. In my experience it has been the lender who, by providing due diligence on account debtors and closely monitoring AR, has the busy entrepreneur been able to stave off credit losses. The business owner certainly bears most of the responsibility when it comes to extending terms and credit limits to their customers. There are areas where I have seen factors act in less than helpful ways. Things like posting cash late, clearance days, charging (but often not earning) additional interest. Some of the perception of factors is deserved, most is not. Lenders are often criticized as giving you an umbrella and asking for it back when it begins to rain. My experience has been just the opposite. Now, there are also dishonest business owners who are the bane of factors. Phony invoices, collecting cash directly, dummy payrolls. I have seen all the tricks and they are sadly more common than malfeasance on the part of the factor. In the end, both lender and borrower have a responsibility to behave responsibly. Like buying a car or house or any big ticket item, both borrower and lender need to know all there is to know about the other to avoid future problems. If I had to guess, I would say 95% of all transactions and relationships work well and are mutually beneficial. The other 5% are disasterous, some for lender some for borrower. Maybe the better example is husband and wife. Sound communication and interaction is vital. I have long made it my practice to personally visit people who I am lending to, and so far it has mostly worked.
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overheard:
“It’s the old story. Everything is shitty when it’s shitty, everything is great when it’s great.”
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I believe that sentiment sums up just about everything in life.
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If you read these comments you realize that their is a big disconnect in the conversation; most of the finance comments are about dealing with customers that are struggling and in need of a life line, I on the other hand was talking about customers that were growing. One is a negative reason for factoring and the other is a positive. One can struggle while ones business is sinking but one can also struggle when ones business is dramatically growing.
I would assume that as finance professionals you would realize the difference.
I never established a loan provision with my factor; all I wanted was AR management, credit decisions, and collections. I have no problem holding 20% and with fees of 2% I couldn’t replicate the AR management services. At the same time, when Walmart takes a 1.6 million deduction from my account without paying any invoices I am smart enough to realize that my factor gave Walmart a 6 week loan from my reserve….and in turn realized that Walmart was more important to them than I was.
Yes, I know all about companies that factor bogus invoices and or get paid and withhold the funds from the factor. I would tell you the same thing I tell folks in my industry: If that is your customer base then you are screwed!
I gave up with doing business with the major retailers because I got tired of financing their incompetency. When you start seeing terms of N90 or N120 that’s consignment. I only have sales of roughly 20% what I did 10 years ago, but my margins have tripled and I work with people who’s handshake still means something.
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Great war stories Carl. Not sure about the disconnect. Factors certainly don’t get a bad rap for providing working capital when others, read banks won’t. Thats the growth vehicle part. They get a bad rap for the other reasons, usually preventive or corrective actions they take to avoid catastrophe. I was merely pointing out that when catastrophe (credit loss) does strike, they are
often the only ones willing to help, even if it is
solely to provide stability while they attempt to be
made whole. In any event, I don’t think one needs to be a finance professional to recognize the difference between a high growth company and a sinking ship. Just saying, in both situations the factor can be an invaluable asset.
Regarding the AR management and credit piece. Technology has change that part of the business tremendously. Credit decisions are better and faster as data is now instant. Manually updated cash receipts and agings are no longer how things are done. There are certainly dinosaurs out there but as a technology company we have never used the archaic systems that were de riguer only 10 years ago and still in use now.
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