Rich Dad Education Blog

Traditionally, factoring is most often defined as a well-practiced method of commercial finance in which a company (the factor) purchases commercial trade debt (invoices) from a business (the client) at a discount to their face value.

An accurate definition, but so what? What does it tell us about its benefits, and why a business would want to sell their accounts receivable anyway? If you are going to define factoring, and you will have to when making sales presentations, present the definition in terms of benefit to the business owner. A “working man’s definition” is as follows:

Factoring is nothing more than a method of commercial finance that relates to the accounts
receivable of a business. It is not a working capital loan to be used at the business owner’s whim. It is arguably the most powerful of all commercial finance tools and simply does one of two things:

1) Allows businesses that are currently operating on a cash basis with their customers to offer terms of payment (30, 45, 60 days) for goods or services provided. In virtually all cases, when terms of payment are offered, customers tend to buy more. Therefore, factoring is a form of commercial finance which finances terms of payment and allows the customers of a business to buy more products and services on credit provided by the factor.

2) Allows businesses that are currently offering terms of payment to their customers and subsequently may have tens of thousands or even hundreds of thousands of dollars of working capital “trapped” in accounts receivable, to free up those funds by selling the accounts to a factor for immediate cash. Once sold, the business can use the freed up capital for any number of reasons, such as purchasing inventory, paying vendor obligations, purchasing new equipment, investments, payroll, etc. Therefore, factoring is also a form of commercial finance which liquidates the accounts receivable of a business and frees up capital for growth and expansion.

The Role of the Independent Broker in Today’s Factoring Industry

Although a $125 billion industry in the United States annually, factoring is not a well-known source of finance in small and mid-sized business circles. Large providers of domestic factoring services have easily recognized names such as Wachovia, SunTrust, GMAC, and CITI Financial, yet a trip to a local branch of these banking giants will turn up little information on the billions in factoring and alternative commercial finance services they routinely provide to cash-strapped U.S. business owners annually. Internationally, factoring volumes are exploding, and the service itself is now universally recognized by the world’s central banks as “essential” to the financial health of small and midsize business owners across the globe.

Even more unknown than the actual service and its financial providers is the lucrative sub-industry of the independent loan broker, or alternative commercial finance consultant . Each year these knowledgeable and often home-based entrepreneurs refer thousands of new clients to banks, factors, asset-based lenders, purchase order finance companies, and other providers of alternative commercial finance services, earning attractive consultant fees and residual commissions in the process.

One of the primary reasons many are attracted to brokering in the factoring
industry is due to the way brokers receive such fees and commissions. As a norm, industry brokers will earn 10% of the factoring fees charged to the client (seller of invoices) by the factor. Most importantly, this arrangement is often for the life of the account. This means once the client is referred and the factor begins to purchase invoices each week, the broker will earn 10% of the factoring fees charged for as long as the client-factor relationship exists. Successful industry brokers learn to build “books” of client referrals and, as a result, will receive multiple commission checks each month for their portion of the factoring fees earned on each referred client. Adding to the earnings attractiveness, such extended commission relationships (and monthly checks) can often last for many years.

Entering the Brokering Community

Though some independent loan brokers uncover this lucrative vocation while performing their normal daily job of accounting or bank-lending, many others discover this unusual career opportunity after being exposed to the cash flow industry and, in particular, the well known product area of discount mortgage notes. In reality, brokering mortgage notes and consulting in factoring and alternative commercial finance have little in common from a business standpoint. However, more factoring consultants are recruited from the ranks of note brokers and the discount mortgage note industry than from any other single source.

While some find entering this unique brokering community difficult, the truth of the matter is success as a factoring and alternative commercial finance broker is really not that hard to achieve once you fully understand the various products and the financial benefits they can provide to cash-strapped small and mid-sized owners. In addition to factoring, most industry brokers will also offer consulting services in asset-based lending, purchase order finance, import-export trade finance, and equipment leasing as well. While a certain level of product knowledge in all these areas is important, most essential to success in the industry is the ability to develop a “marketeer’s” mentality and to acquire the direct marketing and prospecting skills necessary to make the business of brokering commercial finance transactions not only financially rewarding but physically and emotionally enjoyable as well.

Successfully entering this challenging area of commercial finance requires acceptable product knowledge, a strong work ethic, and general marketing savvy and is clearly not for everyone. For career-minded, success-driven entrepreneurs willing to meet the challenges, few professions offer the combination of prestige, respectability, and income potential as those found in the factoring and alternative commercial finance industry.