And if you don't know that by now, you really do need a review ...

By Advance Business Capital

This is the tenth lesson in our series on factoring for truckers, and it’s a good time to go over the first nine. Even those who have been steady readers of this column (both of you) may need some refreshing on how factoring works. We’ll devote the present column to defining the concept itself. The next will cover our first three lessons. The one after that will go over our middle three lessons. And our final three lessons will be covered in Lesson 13. If you’re superstitious, you may want to skip that.

And if you’re easily bored, you may want to skip all of them, though we don’t advise it. Admittedly, factoring is second only to insurance in non-fascinating reading. That’s the problem. For too many people, the only time they go over their contract or policy is when it’s too late to change it. Happily, factoring is a lot simpler to understand than insurance, or at least the concept is. The devil—like so many things financial—is in the details.

Buyer, Be Aware

A word about said devil. When people use that phrase, they’re usually talking about a task that costs time. That’s true here too, but in factoring an overlooked detail can also cost you money, sometimes a lot of it. Factoring is a lightly-regulated industry and for that reason you should never regard it lightly. Act on impulse and you may find yourself in a devil’s contract where the law is no help.

Does that mean you can’t trust factors? Of course not. There are hundreds of factors in the U.S. and many are as honest and straightforward as your local credit union. Some, however, are out to scalp you; they’re usually the best salesmen too (which is why you should never sign a contract you haven’t slept on and talked over with your wife or somebody close). Many others—the largest number—won’t defraud you, but they may sell you a contract you don’t need. It’s like a car dealership. Why does the salesman always steer you from the basic model to the one with all the extras?

Okay, time to climb out of the pulpit and head over to the blackboard. The first problem we have to overcome, and our subject for the rest of this column, has nothing to with money and everything to do with English. Where’s the chalk? Thanks. Now what’s this word mean?

Factor

Unfortunately, it means lots of things. Besides being something having to do with  our interest—trucking and money—it’s also a term in algebra, genetics, biology and—most confusingly—something added to a mix of ideas or situations. It can also be meaningless filler, a catchy throw-in word when you’re stuck for a title (The O’Reily Factor, The X Factor).

What Factoring Is

Try for the moment to forget all those other factors and concentrate on what “factor” means to us. Before we go to a definition, however, you should know that for our purposes “factor” can be both noun and verb. In other words, a factor can factor to you. Likewise, you can factor to a factor. Got it?

If you do, be sure and donate your brain to science and please be patient while the rest of us try to find some sense in of all this fuzziness. We’ll use bullet points to make things simpler. (Oh, and just so all of you know, a factor can also be called a factoring company.) Ready? 

• The act of factoring can mean buying or selling.
• The factor is always the buyer.
• If a factoring company factors to you, it buys something you own.
• If you factor to a factoring company, you sell your valuables to it.
• Factoring is not bartering. The factor pays money for what it buys.

So “factoring” is nothing but an old-fashioned cash transaction. What makes it so special? The answer is what that vague word “valuables” means. We deliberately kept it fuzzy because it’s the nut of the whole concept.

What Factoring Isn’t

In every other case of buying and selling, the thing bought and sold is goods or services. If goods, it’s a car, a trombone, a tract of land, a loaf of bread. If services, it’s car repair, music lessons, training as a realtor or baker.

You can also buy or sell all kinds of paper representations of value: stock shares, an apartment lease, mineral rights, a soft drink formula.

In all these cases, however, the value is already present. The car exists. The baker knows how to make bread. The stock shares are for a real company. None of them are promises for something that doesn’t yet exist. (Of course, realness doesn’t guarantee value. The car may be an unfixable heap. The baker may be a late sleeper. The stock may be for a dot-com that’s dot-bombed. Nevertheless, they are part of the present and not the future.)

Selling Debt

In factoring, the thing bought and sold is an unpaid invoice. Sometimes it’s even a company’s entire accounts receivable. In either case, it’s an uncollected debt.

Notice we didn’t say uncollectible debt. Factors buy paper, but not that kind of paper. They’re not collection companies.

That raises the question of what constitutes a bad debt. It depends. Factors service more than truck companies. There are factors for almost every kind of business: garments, janitorial services, dental clinics, airlines. If a factor buys a hospital’s bills (and they do), it’s prepared to wait a long time to get paid because the insurance industry is solid but slow. Trucking’s different. Factors generally want to buy an invoice that’s as recent as possible, preferably the day it’s validated. If your invoice is over thirty days, they’re much less interested. Over sixty and they won’t touch it. So if you’re thinking of factoring, keep an eye on your invoice expiration date.

Take-Home

End of our first review. Maybe it’s simplistic and obvious. If so, good! You’re already a step ahead of a lot of people. Factoring, despite its ubiquity in commerce, is a strangely obscure activity; part of the reason is because like that other f-word (often applied to factors themselves), it covers a lot of ground.

The take-home point here is that factoring is, as far as truckers are concerned, a purchase. It is not a loan, although many, many people think so, which is their first step into the quagmire of debt. Stick with us and we’ll do our best to keep you on solid ground. See you next class!

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