Part One: What is Factoring?
Welcome to Part One of IACFB’s Factoring Broker Crash Course. By the end of this 7-part course, you will have learned about:
- FACTORING: What it is and how it works to solve certain types of cash flow problems experienced by small businesses worldwide
- FACTORING BROKERS: What is a factoring broker and what does this unique vocation offer for those seeking a full time career or even a part-time home business opportunity
- BUSINESS DEVELOPMENT: An overview of the various ways a factoring broker markets and develops new commission-generating clients
- ADDITIONAL OPPORTUNITIES: Other types of small business finance products offered by most industry brokers
- COMMISSIONS: The near-legendary residual compensation method employed by factors and others to compensate industry brokers for their referrals
- TOOLS: A list of “consultants” tools you will need to enter the freelance brokering community successfully
- STARTUP: How you can quickly and affordably launch a business as a freelance broker (full or part-time) with the assistance of the IACFB
An “Under-the-Radar” Career Opportunity
There are thousands of franchise and other types of business opportunities available to those seeking to leave the world of the typical “low-wage” employee. Few, however, can compare with the opportunities provided through factoring and the alternative commercial finance community. Additionally, this unique niche in the popular consulting industry, although very well known in Europe and Asia, is still very much “under-the-radar” in the U.S. and is seldom referenced in typical lists of business opportunities found on the internet. It truly represents a “golden opportunity” for those that can be considered self starters and mobile creatives and those willing to invest the time necessary to develop the soft skills required to succeed in virtually all consulting-styled businesses.
To understand the opportunities presented to individuals entering the freelance brokering community in the factoring industry, you obviously need to know a little about factoring.
A Brief Introduction to Factoring and the Factoring Industry
Factoring is a well-practiced method of alternative commercial finance worldwide. It is called “alternative” because it is a ready substitute to traditional bank loans in many cases. It is the financing alternative of choice for many small B2B business owners that cannot qualify for a bank loan for their business (about 84%). Such small business owners commonly find a working capital solution through the use of factoring due to it’s flexibility and ease of access, even for very young, early-stage enterprises.
Factoring: Simply a Method of Financing Invoices
- Factoring IS used by businesses that sell to other businesses (B2B)
- Factoring IS NOT used for retailers and those selling directly to consumers
- Factoring IS used to finance invoices and can only be used by businesses granting 30-90 day terms of payment to their customers
- Factoring IS NOT used by businesses that do not generate invoices with credit terms. There must always be invoiced involved for factoring
- Factoring IS NOT “new capital” similar to a loan. It simply unlocks the working capital of a business that is tied up or “trapped” in invoices due from slow paying customers.
How Factoring Works
In addition to it’s reputation as one of the world’s most powerful methods of business finance, factoring is also known for it’s simplicity, as you will come to learn. In a typical factoring arrangement…
- A business (known as the client) periodically sells it’s outstanding invoices to a finance company (known as the factor) for an immediate cash payment (called the advance).
- The factor will evaluate the invoices for validity and if acceptable, will advance approximately 80-90 percent of the face value of the purchased invoices, wiring the funds directly into the client’s business bank account. The balance of the face value which is not advanced is held as reserve in case of non-payments or charge-offs.
- The factor, now the owner of the invoices, waits for the payment. Once the invoice is ultimately paid in 30-90 days, the factor pays itself back for the advance and then remits the remaining 10-20 percent balance, not initially advanced, to the customer in the form of a rebate. Prior to the rebate being released, however, the factor will deduct it’s fees for services (the factoring fees) from that balance.
Accessibility to Small Business Owners
One of factoring’s many attractive attributes is it’s accessibility by small business owners. Most small business owners do not have access to bank financing, or at least not enough bank financing. This is typically due to lack of an established credit history and insufficient collateral. This is where factoring differs markedly from common bank lending and business loans.
Because factoring is a “purchase and sale” transaction rather than a traditional loan, factors, unlike bankers, do not look to their borrowing client for repayment of their advance. The factors advance will actually be repaid by the client’s customers when they pay their invoices under normal terms, and not the client itself. This is why factors are much more interested in the creditworthiness of the customers a client sells to, rather than the client’s actual credit history (or lack thereof). This is also why small business owners, selling goods or services to large, creditworthy customers, will always find accessible financing through a factor, even if their own credit is tarnished or even completely non-existent.
How Large is the Factoring Industry?
Worldwide, the factoring industry is BIG…really BIG. The United States accounts for about $120-$130 billion dollars in factoring volume each year, but that is just a drop in the bucket worldwide. In Europe, Germany’s factoring community alone eclipses U.S. volume and Italy’s small businesses factor nearly double it. The UK provides nearly 4 times the factoring volume as the U.S. With China’s and Japan’s massive contributions in Asian factoring, purchase volumes worldwide are many trillions of dollars each and every year. You can find out a little more about the size of factoring in this Brief Industry History.
Types of Factoring
There are many niche and specialty areas of factoring and as a freelance industry broker or consultant, you will need to learn about them. There are factors that specialize in the trucking industry, factors that specialize in agricultural products, specialty construction factors, real estate commission factors, factors that focus primarily in oil services, and on and on. There are factors that finance based on invoice maturity and other that advance on the day of sale. Some factors even guaranty customer payment of an invoice. Some factors specialize in international factoring and focus on assisting small business exporters. In short, there are many variations and specializations that, as a successful broker, you will need to learn.
Explore the Industry Right Now!
As a prospective industry broker, it will be of some interest to you to find out just how large the factoring industry is. In the U.S alone, there are well over 500 factors or banks with factoring departments providing services to America’s small business. In fact, if you live in any large metro area, there are probably some factors right around the corner from you.
Using your search engine of choice such as Google, enter “factoring” + “your city” in the search box where “your city” is any nearby metro area of size. You will likely pull up dozens of factors right in your area or at least, providing services to your area. Click on a few links and visit and explore their websites.
In tomorrow’s emailed lesson, you will learn about the fascinating opportunities available to enterprising individuals just like you, that are interested in learning more about the lucrative income opportunities that accompany this business or referring prospective clients to America’s factors as freelance independent factoring brokers.