to Finance His Divorce

By Steven Hausman, CEO, Advance Business Capital

Welcome to “Factoring 101,” your continuing online education in the nuts-and-bolts of factoring. All of our lessons are bite-sized chunks of information you can read and digest in a few minutes. This series is provided as a public service by Advance Business Capital.   

Factoring is one of those things that, like term life insurance, nobody wants to understand until they need to, and then it’s usually too late. This is understandable, even though factoring is about money, and people are usually interested in money, but the terms—Recourse, Non-Recourse, Aging, Reserves—are confusing and the process is more complicated than a simple loan. We’ve written nineteen lessons on factoring and the drone of readerly snores can be heard before we’ve even typed the second sentence.

Albert and Maliva
To try and at least get people to click on our lesson, we’ve concocted a firecracker title that should, at the minimum, pique curiosity. Take everyone’s favorite frizzy-haired genius and combine it with that staple of tabloid journalism and country songs—D-I-V-O-R-C-E—and we’ve got an explanation of factoring that should at least prop up your eyelids for a few minutes. 

Here’s the story, which is true. Albert Einstein wasn’t always a funny Jewish granddaddy who made faces for the camera. At one time he was a virile young man, as human as anyone. He married Maliva Maric in 1903 and the union produced two sons. The marriage proved to be difficult and after thirteen troubled years, Albert wanted out so he could marry a distant cousin, Elsa Lowenthal. By then he had lived apart from his family for five years. 

The Catch
At the time, 1919, Einstein was forty and a noted professor at Humboldt University but not yet the public figure he was to become. Maliva, who had two boys to raise, wanted a settlement larger than Albert could provide. In exchange for a divorce, he offered to sign an agreement giving her the money for his Nobel Prize. The catch was he hadn’t won it yet. 

Now it’s safe to say that most divorce-conscious men who promise their wives the money from a future Nobel Prize would be laughed out of the house. However, Maliva, while not quite as smart as her husband, was herself a gifted physicist. She actually understood the Theory of Relativity and calculated that the odds were a lot better than a lottery ticket, in fact very much in her favor. She agreed to the terms. Two years later, Einstein was awarded the Nobel and Maliva became financially secure. 

Nobel Prize I.O.U.
So what does this have to do with factoring? A factor is a company that buys another company’s accounts receivable. In this case, Einstein “sold” his wife the money “owed” him by the Nobel Prize Foundation. All right, we see hands up all over the classroom and we know you’re going to say this is a stretch. We say, at least nobody’s asleep. This is our story and we’re stickin’ to it. 

Here’s how Einstein’s divorce terms are like truck factoring. (Now there’s a sentence we bet you’ll never see in any other factoring blog.) A trucker, Max, sells his invoices to a factoring company, Crown, for cash now. The factor (or factoring company, you can use either term) now owns the invoices. It informs the trucker’s debtors (the shippers or broker) that the money is payable directly to it. The trucker is out of the loop. He doesn’t collect the money and repay the factor. The debtors write their checks to the factor. 

Einstein Factoring, Relatively Speaking
Technically, Einstein’s terms were more like a futures contract than factoring, so this isn’t a precise analogy. In fact, it’s a very imprecise analogy, but there’s enough similarities to drive home the lesson. Einstein couldn’t invoice the Nobel Prize Foundation, but his theory had been proven earlier that year. Relativity was such a big deal that it fundamentally altered the laws of physics established by Sir Isaac Newton in 1671. Was Einstein good to win the Nobel? Can Superman fly? Does a bear… well, you get the idea. 

Maliva Einstein was like the factoring company, Crown, that buys the future income of the trucker, Max. In this case, what she paid Einstein was his marital freedom. 

Banks Loan, Factors Buy
And yes, there are all sorts of ways this analogy falls apart. For instance, Einstein factored (you can use “factor” as a verb as well as a noun) all of his prize money. A factoring company never pays the trucker the full amount of his accounts receivable. Moreover, the factor (Crown) requires an invoice, a legal document that the debtor has acknowledged. The Nobel Committee doesn’t sign letters of intent to future winners. 

Where the analogy holds true, however, is that Einstein, like Max the trucker, sold future money in exchange for benefits right away. Factoring isn’t a loan. A banker will not loan you money on future income. It requires collateral that exists in the here and now. A factor doesn’t loan money; it buys future income. 

The Take Away
That’s the basic principal of factoring and if you understand that, you know more than many, many people in business. Most people know as much about factoring as they do about the Theory of Relativity. If you’ve been paying attention, at least you know one of the two. Good work, Einstein. 

For many truckers factoring is a good deal, but of course not always. Stick with this course and you’ll learn how to tell good deals from bad, and how to make factoring work for you. 

Class dismissed. Come back next month where we’ll compare factoring to …

www.advancebcap.com