Professor Elam

Sat Feb 20 2010

David Hendricks has a good column on factoring in the Sat Express News, I was not able to find it on mysa.com to link but the upshot is that  a start up company is using factoring for financing. Factoring is the process of discounting an invoice at a substantial cost in exchange for cash, here is my take. 

I always enjoy your column although as usual I could not find it to hyperlink for my students at mysa.com, oh well

At any rate, I have some experience factoring for other businesses and my question for Bio Pulp is, how will you get off the factoring treadmill?  I would very much like to see that excel spreadsheet projection. Bio Pulp is paying way over the bank rate all right, 15% or more I would guess. Does this business actually net 15% on sales?  If not it is hard to see how they are anything but a bank resource.  Yes they believe they have cash flow but that is not what a cash flow statement would indicate.   Every invoice does not result in cash flow, net cash flow would be the sum of 

operations

financing 

investing

here financing offsets operations, and the fact is that Bio Pulp is never developing its own cash flow, it cannot get above the debt incurred. A venture capital rescue would have to pay off the factoring debt, I doubt Bio Pulp is doing much more than paying the interest. And then the VC would have to pony up that much capital again, or it is back to the bank. 

Your article reflects the same thinking as the accounting textbooks, but my experience is that it is near impossible to stop the factor treadmill. Even if business triples, their demand for more credit will expand. 

The horror of the factor of course is that somehow the business manages to keep the money from the next invoices, and skips town with the bank debt unpaid.  I am not suggesting these fellows are unscrupulous but that is the danger, esp if it dawns on them a VC bailout is not likely. That is after all what happened to the local Dem party reflected in another column in today's paper, the water is shut off, where is Dwayne?

PS In our own business we factored for an individual, the problem was he always wanted more money, at $100 plus I thought I had enough of his invoices, what to do?  No harm done but I could not get him to realize that he needed to stop factoring if he was ever going to make any money….Most small debtors sadly do not grasp that concept.