To me, as to most investors, the vast majority of investment products are unappealing. They either grow too slowly ― like government bonds or term deposits ― or they are too unpredictable ― like individual stocks. In my investing, I prefer observable and relatively certain growth, and for that reason, I like investing in factoring.
Factoring has existed for ages ― almost since the rise of economic systems ― but many investors are unaware of this common and useful business service. If you are looking for a Goldilocks investment, you might consider factoring for the following reasons.
What Is Factoring?
Invoice factoring, or factoring receivables, is a service provided to B2B businesses eager to collect money faster than their clients might pay. The process is simple: Businesses sell their unpaid invoices or accounts receivable to a factoring company, like BlueVine or TBS Factoring, that then receives the delinquent client’s payment. Many businesses benefit substantially from the service by avoiding the significant costs of chasing delinquent clients; plus, factoring is faster and easier to achieve than taking out business loans. Factoring is a reliable way to keep a company’s cash flow healthy.
It is important to note that factoring is not the same as account receivable financing. In the former, factoring companies purchase invoices or receivables, so businesses expend little to no effort chasing payments. In the latter, businesses use their receivables as collateral for a loan, so businesses must then pursue their clients to repay the sum they initially borrowed. Unlike traditional lending scenarios, factoring requires three parties ― a seller (the business), a buyer (the factoring company), and a payer (the business’s client) ― and only the creditworthiness of the payer matters. Contrastingly, accounts receivable financing occurs between only two parties, and a business must have good credit to acquire a good deal.
Who Uses Factoring?
Most factoring companies prefer working with B2B businesses because their receivables are more likely to be paid. This, in addition to a handful of other typical requirements of factoring ― such as payment terms, sales policies, and client quality ― is why businesses in some industries tend to factor more frequently than others.
The most common businesses to participate in factoring include:
- Commercial construction or landscaping contractors
- Distribution companies
- Maintenance or janitorial agencies
- Manufacturing companies
- Oil and gas service companies
- Temporary staffing agencies
- Transportation or trucking companies
- Security firms
Why Should I Invest?
Though few outside of business are aware of the service, the factoring industry is quite large and longstanding. Worldwide, the market is worth about $1.5 trillion annually ― and about $150 billion of that is from North America alone. Even better, the factoring industry grows bigger and stronger every year.
Investors profit by supplying factoring companies with the capital necessary to purchase invoices from businesses looking to sell. Some factoring companies issue bonds on the market that investors can easily afford; for example, bonds can require as little as $10,000 as investment and pay 7 percent interest for a single-year term. It is a small, low-risk investment that yields almost certain returns ― which is why I love factoring.
Are There Risks to Factoring?
Yes, but there are risks to any investment. With such bonds, your money is locked away for the entirety of the term, which means there is no chance of liquidating if you need cash fast. Some investors are hesitant to place their money where they have no hope of reaching it. However, more considerable risks are the lack of guarantees on the investments. Not all factoring companies do sufficient diligence, researching the receivables to determine the likelihood of being paid. Investing in companies that factor unreliable businesses is almost a surefire way to suffer losses.
Fortunately, there are ways to mitigate these risks. You absolutely should perform your own research and invest only in factoring companies with histories of reliable payments and that work in industries you have a familiarity in. You might even consider conducting an interview of the company’s management to determine whether you trust that company’s decision-making ability. In the end, you should only invest if you feel confident that you will see a positive return.
All investments are essentially gambles, but you can make money by placing your bets on sure winners. Factoring investments tend to provide sizeable profits with minimal risk, making them my favorite investment product to date.