Household HSBC Watch

From: Inc. Magazine, December 2003 | Page 90 By: Martin Mayer

When the United States invaded Afghanistan, the armed forces needed a great deal of infrastructure support, everything from electric generators to water purifiers to road-repair machinery. Among the companies the government contracted to supply such things, and get them to where they were needed, was a South Carolina outfit called IAP Worldwide Services, specialists in logistics. Before IAP delivered the goods, it had to buy them and meet payroll. IAP faced one of the classic business problems: Business was good but cash flow was bad. To get the required cash, the company turned to Rockland Credit Finance in Owings Mills, Md., one of a flourishing number of “factors.” Factoring is among the oldest forms of banking (during the Renaissance it helped make the Medici family very rich), but it doesn’t work the same way as an ordinary loan. Instead of advancing cash to a business on a pledge that it will repay the bank down the road, the factor actually buys the legal right to collect a company’s outstanding invoices. The factor gets its money when the invoices are paid. The business gets its money now, minus a fee that can run as high as 3% of the amount due.

With the likes of GE Capital, Wells Fargo, and even UPS in the game, any fear that using a reputable factor is akin going to a local leg breaker should be gone. (See this list of factors who belong to their main trade group, the Commercial Finance Association, whose members include all sorts of asset-based lenders.) However, a caveat emptor is in order: Business owners need to have their attorney or accountant check out the bank and customer references of any factor, including those on this list. Factors have been known to go out of business still owing their customers substantial amounts of money held back in reserve from invoices already paid up. Even worse: Some shady businesses that identify themselves as factors are really just loan sharks fully prepared to threaten or coerce clients who owe them money.