When you Factor Invoices, Be Ready to Give Up Title

A few years ago, I was contacted by a local printing firm. They had been in existence for many years and were well-known in the community. That year, they had been experiencing impressive growth with many of their large commercial accounts. They needed working capital to support the growth and their bank would not loan them the amount they needed. (You know how banks are).

It was a family-owned business and I worked with the Son of the original owner. The Father was still active in the business, but mainly dealt with the larger customers and allowed his Son to run the administrative areas. I explained the factoring concept to him (including the fact that it is a lot more expensive than bank financing). He was happy to know that his ability to generate working capital from invoice factoring was only limited by the company's pool of receivables. He filled out an application and submitted the other information required.

When I got the quiote back from the funding source, I set up a meeting with both the Father and the Son to go over the LOI. They were fine with the fee structure, advance rate, and other points in the agreement. But when the Father noticed that the factoring company would be filinig a blanket UCC on the receivables, he got angry and said there's no way he would do this. That was the end of this deal.

I don't know what he was thinking. If he ran a factoring company, wouldn't he want some type of protection for the money you've outlayed to companies? Unless you're willing to encumber your accounts receivable, you should not consider factoring (or most any other type of outside financing). There will ALWAYS be a UCC filed on the A/R.
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Kent Harlan, CPA
Ozarks Capital Funding, LLC
www.ocflink.com
kenth@ocflink.com
417.849.7394