Hennessey Capital: What Is Factoring?

Factoring, though helpful to a startup vendor, can be dangerous for a customer. In my experience, as a customer of companies who factored their invoices, it can lead to hostility between the vendor and the customer as it is a third party that collects on the debt. Many Factors act more like collection agencies then partners. For example, if the customer is unhappy with the invoice/product or has returns/credits to deal with, the Factor will not understand and will simply demand payment without regard for relationships. There is also the issue of vendors who factor fabricated invoices and then skip town. I've seen this happen numerous times.

In responce to Mr Schumacher's comments dated 9.08.08 regarding factoring being potentually dangerous and leading to hostilities between the factor and their client's customer base, this is truly the exception and not the rule. I've spent over a quarter of a century now in the factoring industry's business development arena and have worked sucessfully with literally hundreds of clients providing them with the necessary working capital they need to help grow their businesess. One of the most important components to my suceess has always been open communication with my clients. Should a hostile environment take root it is typically because the client is experiencing a cash crisis and rather than calling their factor to discuss a temporary solution, they decide to break covenant with the factor and begin to redirect funds and/or tries to submit invoices in advance of shipping products or completing services (this is a big NO NO). Open and honest dialog with the factor will always avoid hostilities, provide solutions and always rule the day!

The factoring company makes money by collecting. Accounts that drift too long have to be written off so, at the very least, that's a guarantee.