In my post, Image, I told the story of Gandhi’s first Halloween. It was funny how my puppy was perceived so differently by parents (Oh, no, it is one of those dogs) and children (Look, Fang!), when really, he was just my very sweet natured, goofy puppy.
Factoring is kind of like Gandhi on that first Halloween – it all comes down to the misunderstanding around what a factoring transaction is. I get this all the time…
“Oh, you loan money to businesses.”
“Oh, you lend against invoices?”
“LDI is my lender.”
No. No. ~ foot stomp~ NO!
Factoring is NOT a lending product. Factors are NOT lenders. We do NOT loan money. We just don’t.
Factors purchase invoices. Every transaction we do is a buy/sell transaction – NOT a loan.
So often when talking to people – prospective clients, bankers, CPA’s, bookkeepers and even other Factors, the “L” words work their way into the conversation. I have made it my mission to correct the misconception that the “L” words apply to what we do.
Factoring transactions are buy/sell transactions. Period.
If you look at a balance sheet, there are two sections – assets and liabilities – what you have and what you owe. Right at the top of the asset section is “Accounts Receivable” – invoices. Invoices are assets of a business. They represent money that is owed to the company. Just like a “hard” asset like equipment, etc., invoices represent a value to the company. And, just like any other asset of a business, an invoice can be sold.
Factors purchase invoices. We do not loan money against the invoice, or asset; we buy the asset outright. By doing so, the business converts the non-cash asset of a receivable to a cash asset that can be used to operate and grow the business.
In K.I.S.S., I used merchant card processing as an example of how factoring works. That example clearly shows that there are no “L” words in play.
To add perspective to that example, here is another.
Imagine you have a car parked in your driveway with a “For Sale” sign on it. I am walking my dog down your street and I see the sign. I go home, do my research on the value of the vehicle, call you, ask to drive the car and have my mechanic check it out. I drive the car and like it. My mechanic gives it his seal of approval. We come to an agreement that I will buy the car. I deliver the cash and drive the car home.
The end result is that we both got what we wanted. You got the cash you wanted/needed and I got the car. The transaction is complete.
In Factoring, we research the value of the invoice we are interested in purchasing – we are the mechanics who check them out. If we like what we see, we buy.
Over the years, I have come to believe that many people, Factors included, use the “L” words because it seems easier to understand. Everyone understands what a loan is, right? It seems, well, easy, to make it easy. It is not.
This is one of my major pet peeves. I often stop people mid-sentence when they use the “L” words to explain what factoring is. I am all for keeping it super simple. However, when super simple is also wrong, nothing is super simple anymore…
That is the lesson…
Complex explanations, broken down into bite sized pieces are always better than simple explanations that are wrong…