The potential financial struggles of CIT and the impact it could have on small businesses, specifically ones that are factoring, has been a popular news topic the last few days.  There is one point many factoring clients usually don’t consider when evaluating factoring options, but might become a major factor should CIT fail.  It has to do with reserve accounts and when those monies are returned to the factoring client.

 A factoring client that has factored a $10,000 might receive an $8,500 advance.  Once payment in full is made by the client’s customer, the client will be returned the $1,500 balance minus the factoring fee (discount).  The question that come into play here is WHEN is that money returned?  Some factors return the money the next day, some the next week, some at scheduled intervals twice a month.  Either way, the factoring company goes from “lender” to “borrower.”  In other words, at some point they actually OWE their client money.  The amount owed could become significant if the factor utilizes a reserve account, which are funds held to offset fees or delinquent invoices.

If CIT does file for bankrupcy, what does this mean for their clients?  The first answer is obvious - they will need to find another factoring company.  The second is not so clear.  Clients that are owed money by their factoring companies suddenly become “unsecured creditors.”  Not an attractive place for a business needing immediate cash flow.

Look for this arguement to be used at some point when CIT claims it is too big to fail and will take down many small businesses with it.  In the meantime, any companies out there looking for a replacement to CIT’s factoring should give me a call!