If I Factor, Will I Lose Customers?

There are two myths that, unfortunately, have tainted many business owners' perceptions of alternative financing techniques such as factoring. One is that factoring is too expensive. Another, addressed here, is that if you factor you will lose customers because you appear financially weak.

Under a typical factoring arrangement, your customers are instructed to remit payments to a specific P.O. Box controlled by the factor. This scares some business owners. They fear that customers will assume their business is in trouble and will abandon them. But this is simply not the case.

In reality, every payables department in every large company remits payments to third parties and P.O. boxes all over the country without giving it a second thought. The payables clerk simply registers the address change in the company's system, and very few people outside the payables department are even aware of this change.

Part of the reason is that factoring is much more common than most business owners realize, and it doesn't catch most accounts payable personnel by surprise. In fact, when an invoice is properly factored, it usually receives more attention because the payables clerks know that:

• The invoice will be accurate and all of the paperwork will be in order.
• If there are any paperwork issues, they will be addressed quickly and professionally by the factor.
• Factors report directly to the major credit bureaus, so clerks make sure factored invoices are always paid on time.

It's also important to note that a good full-service factor will not benefit by involving itself in disputes between clients and their customers about product or service quality or delivery deadlines. In fact, a good factor will reduce the number of disputes by making sure all customers are creditworthy and by finding problems early so they can be addressed quickly.

Types of Notification

Notification is the means by which your customers are informed about the factoring arrangement. There are many subtle ways they can be notified, and an experienced factor will know the best way to do it. Regardless, it's important to contact key customers ahead of time and let them know about any remittance changes.

In some cases, the customer is simply informed of a new remittance to a specific P.O. Box without mention of a third party. In others, the client will write a detailed letter to customers stating something like:

In order to accommodate rapid growth and maintain the high quality of our service, we have retained the professional services of [factor's name], a highly respected source for accounts receivable management and funding. As part of its service, the company is providing us with a centralized billing and accounts receivable system. Therefore, we request your cooperation in remitting payments on all open and subsequent invoices to …

A good factor will work with you and advise you on how to go about instituting the proper notification process. The key is to explain the arrangement clearly to customers in advance so there are no surprises later. By ensuring good communication between all parties involved -- your company, the factor, and the debtor -- you will go a long way toward busting the common myth that factoring will result in lost customers.

Be sure to also read Factoring & Financing: Seperating Fact from Fiction.

Tom Klausen is the senior vice president of First Vancouver Finance in Vancouver, British Columbia. Klausen has had extensive experience in providing alternative financing solutions to small business owners, and also provides business management consulting services to both traditional and nontraditional lenders throughout North America. He can be contacted at (604) 988-1490 or via email atTKlausen@fvf.ca.