Whenever I speak to a potential factoring client for the first time, I always feel like there is a big blue elephant in the room. The client knows there is a cost, but might be afraid to ask. Typically, the new client views a factor as someone that is taking money out of their pocket. You see, they have gone through all the effort of selling their product or service, manufacturing it, delivering it, and now they sit and wait for the checks to arrive. But they don’t. Their customers pay when they are ready, not when the client needs the money. What are they to do?

So they call IFG. And suddenly, instead of receiving 100% of the amount they billed their customer, they are going to receive something less. This is not a happy moment for a client. Unless…

Factoring has existed for hundreds of years. Why? Because companies that factor invoices provide a valuable service. It makes no sense that if factors left their clients in a worse position instead of a better one, companies wouldn’t use them, and there would be no more factoring companies. Why would a company factor invoices if it left them worse off? They wouldn’t. The answer lies in the discrepancy between what the client usually thinks is important, and what really is important. Let me explain.

If a client sells widgets to Customer A for $100, they expect to receive $100. But when they factor the invoice they may receive $97, so they feel they lost $3 somewhere in the transaction. However, if the client is able to sell more widgets to Customer A and also acquire Customer B because he has the cash to purchase more inventory, his bottom line profit improves, and that is the value of factoring. Most business owners get so caught up in the size of top line revenues (or at the very least, net revenues), that they forget about what is really important, having the cash to run their business and produce larger bottom line profits.

I have found that all of IFG’s clients eventually understand this concept. For some it happens before our first spot factoring transaction. For others it might take a few months. However, it is irrational for a client to continue to use factoring if they are worse off for doing so. Sure, there is a cost for factoring, but if the value received when factoring exceeds the cost, it is an effective tool to help grow a company’s profits. And isn’t that why we are in business in the first place?