product directly to the end customer or to a third- party warehouse,
where it stays until it is shipped to
the end customer.
5. The seller then invoices the shipment and sends the invoice and corresponding copy of the customer
PO to the factor.
6. The factor funds the invoice at its
discount, paying the PF its loan
plus a fee.
7. The factor (or bank) collects from
the end customer and pays client
his residual left from the advance.
Beyond expenses, this is probably 3-5%
per month, fee-based, not interest-based, on the cost of what is funded.
Other costs are:
◗;pass-through bank fees
◗;due diligence and legal fees (about
If a factor finances a $100,000
invoice, it may advance a client
$80,000. If the end customer only paid
$50,000 on the invoice, the factor is
out $30,000 plus fees. To insure against
the customer defaulting, on the next
$100,000 invoice, the factor says: “I am
owed $35,000, so I can only advance
the client $45,000 this time.”
The client submits another in-
voice for $100,000. If the PF becomes
involved in the transaction, it will
ask for a sign-off from the factor
before financing the deal. Once this
merchandise is shipped (thus becom-
ing a receivable), the factor has two
choices: A) Fund the $80,000 to the PF;
or B) Allow the PF to collect on the
invoice. Although the factor cannot
make up the $35,000 loss it suffered
on the previous receivable, by the PF
financing the new transaction, it has
created $20,000 of increased collateral
for the factor. Payments from the end
customer help pay off the shortfall
and help the factor get out of the
transaction. If the PF isn’t there, this
client cannot get the goods shipped to
In a nonrecourse situation, the factor
guarantees the receivables if they go bad.
In a recourse situation (more prevalent
today), creditworthiness doesn’t mean
anything to the factor, which is calculating the total portfolio. If something goes
bad, the recourse factor figures that the
remainder of the portfolio will keep its
monetary assets afloat.
The factor may handle the specific
receivable. Or, if the factor decides not
to fund, the PF will step into the factor’s
shoes and own the receivable. It will
either collect out directly through the factor, with the factor knowing that all funds
available against that invoice will go to
the PF; or the PF will collect directly from
the end customer. The factor cannot share
its default with the PF. The factor cannot
use the PF’s assets it has signed off on,
because the transaction now belongs to
the PF. After all, the factor has agreed to
take the PF out of the transaction on the
advance of the receivable. The factor cannot claim this payout as its own because
it is short.
The PF’s initial funding usually doesn’t
convert to a receivable for 30 to 90 days.
With this understanding, the factor must
approve taking out the PF prior to the
start of funding. After all, it’s possible a
company that was creditworthy 90 days
ago is no longer creditworthy. However,
the collateral remains and the PF cannot vacate the transaction. If the factor
wants this collateral, it has to purchase it.
Thus, the factor cannot sign off that the
receivable belongs to the PF, which will be
financing it or holding onto it. At the end
of the transaction, the factor cannot lay
claim to the receivable.
This should be a symbiotic relation-
ship with common goals. For instance,
factors should appreciate that PFs bring
merchandise inspections, predelivery
order verifications, security measures,
checks on orders (in case of failed inspec-
tions), and documentation to the process
—processes that factors do not normally
have available. (Often, the factor is simply
relying on its client to get merchandise
properly delivered into the warehouse or
store.) No matter what happens, the fac-
tor is no longer taking any further credit
risk on these deals.
Richard Eitelberg is founder and president of
Hartsko Financial Services, LLC (www.hartsco.
com). Based in Bayside, NY, Hartsko handles
about $180 million in annual transactions
ranging from $50,000 to $10,000,000.