COMMON OBJECTIONS TO FACTORING
1. We don’t need it!
a. What kind of terms are you giving your customers?
b. How long does it take them to pay?
c. Could you manage your business better as well as finance its growth if you had that money sooner?
2. We do that ourselves!
a. It may sound like GFR is a collection agency but we’re not.
b. We advance money to your business based upon your invoices to your business customers and we wait for them to pay. Meanwhile, you have the use of your own money to better manage your business and to finance your companies growth.
3. It sounds too good to be true!
a. Just because you haven’t been exposed to this kind of financial service doesn’t mean that it doesn’t exist.
b. Factoring has been a powerful financial tool for centuries but until recently only very large companies could qualify for factoring.
c . Now small to medium size companies can qualify and receive the benefits of this financial service.
4. I’ve heard of factoring, but I’m too small!
a. Instead of waiting for your customers to pay your invoices, would your business benefit from having most of that money right away?
b. Would you be more comfortable with a factoring program that doesn’t require a minimum monthly volume and doesn’t require an annual contract.
c. How would it feel to know that you control your money instead of your customers or your bank?
5. We already have a credit line!
a. Great! How big is it? How much of it do you use?
b. Would you like to have access to larger amounts of funding? We can work in cooperation with your existing credit line to make that possible.
c. How would you like to have working capital that works the same as a line of credit without incurring any debt?
6. We see the benefits of factoring, but we’re afraid our customers will think we’re in financial trouble and they will look for alternative sources for our products or services.
a. The fact that your company does qualify for factoring makes a powerful and positive statement about the strength of your finances and the factor’s level of confidence in your business.
b. If your neighbor received a multi-million dollar credit line from his bank, what would you think of him? We’re providing a virtually unlimited credit line to you based only upon your receivables as collateral.
c. In the process of verifying an invoice we tell your customer that you have been provided an unlimited credit line based on your accounts receivable and we are providing receivables management in conjunction with that credit line.
7. We wouldn’t do that to our customers! We’re afraid it will offend or alienate our customers!
a. You are doing it for your customers. Factoring will enable you to continue to provide the high quality of products and services that they have come to expect. Your customers will also continue to enjoy the generous trade terms i.e. 30 days or more, that factoring will enable you to continue to provide for their benefit.
b. In our communications with your customers we only refer to this service as receivables management in conjunction with the unlimited credit line you have received to accommodate the growth that you are experiencing
8. Must the customer be contacted?
9. Who is the check made payable to?
a. The check is made payable to the factor.
10. Where is the check mailed?
a. The check comes directly to the factor.
11. What do you charge?
I know how important that is to you. I’ll be happy to get an answer to your question, but I don’t know enough about your business to obtain a rate quote. So tell me: What terms do you give your customers? How long does it actually take your customers to pay? What is the size range of your invoices? Where do most of them fall in that range? Who are your customers? What are your monthly or annual sales? What is your gross profit margin? What are your accounts receivable right now? How much is current, i.e. under 30 days? How much is over 90 days old? How much bad debt did you write off last year? Are there any liens or judgments against your firm? Are there (SBA) loans, credit lines, or bankruptcy?
12. We just met and you are asking for a great deal of personal and confidential financial information!
The burden of risk is on the factor who will give you money while you only give him paper. When we have a thorough understanding of your business situation, we can arrive at an appropriate and responsive fee/advance structure.
13. It’s too expensive!
a. Compared to a bank that isn’t willing to lend you the money, or all the money you need, and if they do, they charge or impose many of the following: Points and Service Charges Application Fees Appraisal and Auditing Fees Compensating Balances Inadequate Loan Limits Pledge of All Your Assets Extra Accounting/Bookkeeping Expense Documentary Stamps & Recording Fees Legal Fees & Escrow Costs Title Insurance Premiums Lender Inspection Fees Credit Insurance Premiums Renewal or Extension Fees Collateral Valuation Fluctuation Environmental Surveys Possible Credit Impairment Loss of Control & Regulatory Exposure Lender Ownership Change/Larger Bank Syndrome
b. Compared to spending 1 or 2 days each week chasing money or receivables instead of concentrating on running your business and getting more business
c. Compared to lost profits because you can’t fill new and larger orders?
d. Aren’t you willing to pay (an estimated 2 to 5 cents) out of each dollar to ensure the full use,benefit, and pleasure of the remaining (an estimated 95-98 cents)?
e. Don’t simply compare the factoring fees to your current dollar volume. Look at the fees in relation to the enlarged volume that you will reach by the creative use of factoring.
14. Five points for 30 days! Wow! That’s 60% a year!
a. It’s tempting to multiply by 12 to annualize the fees, but let’s examine this in detail. If you borrow $100,000 from the bank at 12 % you‘ll make monthly payments of $1000. In a year you will have paid $12000 and still owe the $100,000. If you factor $100,000 each month for a year at a 5 point discount, at the end of a year your fees would total $60,000. You would have had the benefit of $1,200,000 (12×100,000) and the fees would still represent 5%. And you don’t have to pay it back!
b. How often have you wished you were in a COD business? If you could convert your business into COD simply by offering a discount across the board to your customers, how much of a discount would you offer? Dun & Bradstreet conducted a survey and learned that many businessmen offered as much as 15% discounts while most offered at least a 10% discount. We’re going to convert your business into COD for half that discount! c. Bottom line questions: Can you better manage and enjoy your business with faster cash flow? Can you make more money if you had access to better cash flow? Can you make your business grow with better cash flow? Are you willing to spend 2 to 5 points to net an additional 20-25-30-35% on our money?
15. How can I pay you 3 points when I’m only making 2% profit myself!
a. If you’ve been short of cash, you probably haven’t been taking advantage of all the discount opportunities for early payment from your venders and or haven’t been buying in the most economical quantities. These discounts alone will offset a substantial portion of the cost of factoring.
b. You could raise your price by just 1% across the board and pay for factoring one third of your receivables.
c. The core issue is whether you can do more business if you factor. Because fixed costs and overhead don’t increase in proportion to sales, the added volume made possible by factoring usually results in a much higher percent of profit on the added business and on your business, overall. For example: Before Factoring With Factoring Sales Revenue $100,000 $200,000 Cost of Goods $60,000 $120,000 (60%) Gross Profit $40,000 $80,000 (40%) Overhead $36,000 (36%) $48,000 (24%) Cost of Factoring -0- $5,000 (5% of $100K) Net Profit $4000 (4%) $27,000 (13.5%)
16. Many of my customers pay in 60 days, some even longer! I don’t think I can afford to factor.
If you mean that you don’t want to pay 60 day fees but still need to speed up cash flow, we have several solutions: First, you could factor just the quick paying customers since they would be your least expensive source of cash. The fees would be less and the reserves would be paid sooner. Secondly, you could delay the funding of invoices for 30 days so that you would only pay 30 day fees on your 60 day payers. In the process you’ve converted all your customers into the equivalent of 30 day payers! Third, use this service as a factoring credit line. Submit your invoices as you generate them, but draw advances only when and in the amounts needed. The fees will be pro-rated, i.e. you’ll pay fees in proportion to the funds and the time that are used. If you take half of the normal advance, the fees will be half and you’ll always be in complete control of your cash flow.
17. How much do you advance? Your 65% or 70% is simply not enough!
After the first month you are virtually COD, so the percent of advance isn’t really an issue, is it? In the second month you receive the current advance and the reserves from last months’ paid invoices.
18. Do I have to “buy back” invoices after 60/90 days or some other deadline?
Not necessarily. You have several alternatives: Exchange invoices. Offset against reserves. Return the advance i.e. buy back
19. Are you recourse or non-recourse? I think I would prefer a nonrecourse factor.
Let’s examine your real purpose in factoring. Are you factoring to access funds to grow and enhance your business, or are you trying to transfer the risk of doing business with your customers to a third party, the factor? Non-recourse factoring contracts, when carefully analyzed, only eliminate the risk of bankruptcy of the customer. They don’t insulate the client from the risk of disputes with the customer. The most common cause of refusal to pay an invoice is a dispute over quality, delivery, or specification. None of these risks are eliminated or even reduced by a non-recourse contract. A non-recourse factor must endure the risk of financial failure of a customer, so it stands to reason that customers will be placed under a “credit microscope” and the risky will be rejected. If the client is factoring to access additional funds, a non- recourse contract may be contrary to the clients best interests, because it may actually limit access to funds. A modified recourse factor with receivables/credit insurance, as we are, can insulate the client from financial failure of his customers yet maximize access to funds. When the client stands behind his customers, the factor is willing to fund the marginally creditworthy customers because he has recourse to the clients’ other receivables.
20. Why must I pay fees based on the face value of invoices when the advance is only a portion of that?
a. Carried on the factors books is face value.
b. Taxes paid on the face value.
c. Insured for face value.
d. Risk is on the face value.
e. The face value is the only constant. The advance may vary and the fees can be pro-rated.
21. Why do I have to pledge all of my receivables as collateral on the UCC-1 when I’m not factoring all of my receivables?
a. When you pledge your house as collateral for a mortgage you can’t pledge just the top floor or just the garage. The term, accounts receivable, may sound like a plural but it’s one class of collateral and can’t be divided.
b. There is no collateral value in having recourse only to the nonperforming receivables.
22. Why must I sign your agreement as a corporation as well as give my personal guarantee?
Corporations don’t make mistakes and don’t commit fraud. People do. You are simply promising not to commit fraud.