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Fast Payments a Factor in Receivables Business

Ernie Tarut, owner of Old Gringo Boots, a Chula Vista maker of handmade boots, can easily qualify for a bank loan, but prefers using a factor to finance his 18-year-old business.

Factors advance funds to borrowers by purchasing their accounts receivable or invoices to customers. The client gets close to 90 percent of the money within a few days, while the factor keeps all money collected, less reserves and administrative fees.

For Tarut, borrowing with this system as opposed to obtaining traditional bank loans is a no-brainer.

“The service level I get from Pat (Patricia Burns, the president of Primary Funding, his factor) is vital for me,” Tarut said. “For what I pay her, it’s worth it.”

Because they are short-term lenders, usually dealing with smaller businesses that cannot obtain bank loans, factors have to be careful.

Yet, unlike banks that scrutinize a borrower’s credit history and ability to repay, factors focus strictly on the customers who pay the invoices.

“We shift the due diligence to the customers because they’re the ultimate source of the repayment,” said Burns, a veteran financier who’s been in the factoring industry since 1974, and the owner of Primary Funding since 1994.

The cost is higher than a bank loan and varies depending on the industry, length of contract, and volume of business or invoices purchased. If you’re looking for a one-time or “spot” advance on receivables, it’ll cost you even more.

Burns said she’s seeing a lot more business this year after banks tightened their lending standards due to a rising number of problem loans.

“Banks aren’t lending and the value of collateral has diminished so more small businesses that used home equity lines to finance are seeing those equity lines frozen,” Burns said.

Primary Funding gets most of its clients through bank referrals from institutions eager to avoid taking on new problem loans.

A common triggering point that causes a bank to spurn customers comes when a business fails to make a quarterly profit or violates some other aspect of the loan agreement, Burns said.

In the past, banks would often work with borrowers and give them another quarter or two to see if things turn around.

Not so this year, says Burns. “We’re seeing a lot of companies that were with banks for a long period of time and, because of the economy, they lost money in a quarter, and now the banks are pushing them out the door.”

Primary Funding provides financing ranging from $50,000 to $1.5 million a month. For contracts above $1 million a month, the business “participates” or shares the financing with a second factor.

Most of Burns’ 65 clients are smaller businesses, which generate from $100,000 to $400,000 a month in account receivables.

Clients span a variety of industries, including furniture and textile manufacturers, temporary staffing firms and food product makers.

Peter Amundson, business development manager for America’s Factors, based in Santa Fe Springs, said his firm has seen “a marked increase in business,” this year although he could not provide dollar amounts.

“We’re also getting higher quality deals that we wouldn’t usually get,” he said. “It’s all due to the banks tightening their credit requirements.”

A typical scenario involves a business that’s owed a considerable sum by its customers, but doesn’t have the cash to make payroll, he said.

Amundson said another advantage to using a factor is the bill management and collection service that comes with the relationship. “We become their back office,” he said. “It frees up their time to seek additional business rather than being in a constant collection mode.”

Tarut said this is one of the main reasons he sticks with Primary Funding. Old Gringo has $1.4 million in receivables Primary is collecting.

“I haven’t had a loan for over six years,” Tarut said. “Once you go over six figures, you have to sign off on your grandmother. And it’s not really that much cheaper.”

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The News:

Factoring, or lending money by purchasing a business’s accounts receivables, is an important source of cash for many small businesses in a slow economy, and in good times, too.


The Issue:

The higher interest rates charged by factors can appear costly, but factors require less paperwork than banks and take the hassle out of collecting on invoices.


What’s Next:

Expect to see more small businesses turning to factors now that banks have frozen home equity lines and tightened up lending requirements.

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