Factoring vampires

When I took over Jeffries, I had almost no money in the bank to fund it. Classic small business problem. The first six months were tough – in order to pay the bills we had to wait for payment to come in job by job. I never told a supplier that I could not pay them until my client paid me, but that was what was in effect happening.

I never quite got to the technical definition of insolvency (not being able to pay our bills as and when they fell due) but we came damn close. The worst it got was one pay day when I headed to the bank to get the wages, knowing that I did not have enough money in the account. I stopped at the letterbox on the way and, miracle of miracles, there was a cheque from a client who still used bank cheques, and it was for the exact amount of the wages, plus ten dollars.

Like I say, that was the worst. The cash started to flow and we were good. But as I started to push the business and it grew, I came to understand the way managing cashflow in an expanding business is life and death. Extracting the cash from your clients without alienating them is a deft ask, and managing your suppliers is almost as difficult. If you cannot do both you are stuffed.

As we became a bigger concern, my bank manager suggested looking at cash flow financing. I was reluctant – I had seen the books of several failed print shops, and for many of them it was their cash flow financiers who ended up pulling the plug on them. Almost to a shop they were factoring their invoices – and it killed them.

If you have not heard of it, factoring involves borrowing against the value of your invoices from a finance company. They give you a portion of the money immediately and charge interest on the balance until the invoice is paid in full. In theory it sounds alright-ish but it is an awful system.

Aside from the punitive interest you end up paying the finance companies, you have to tell your clients you are doing it and they end up having a legal obligation to the factoring company, not you. The finance companies ring your customers to make sure you have delivered the job before they have to pay you. And the finance company will harass your customers to make sure they understand they owe the finance company the money, not you.

At best it makes you look like you cannot manage your money and at worst that you are so untrustworthy your financier has to check up on you all the time.

During our peak periods we often send out a lot of work to other printers, and in the last six months all but two of the printers we use on a regular basis have started factoring. It has been a massive pain in the arse, not least because the finance companies are aggressive and difficult.

As soon as you get the first letter they are on you for an acknowledgement that they own the debt. I had no intention of dealing with the first one who rang, told them to get stuffed and that I would be only dealing with the printer direct .They told me that as I had given the printer a job after I had received the assignation of debt letter I had agreed to the terms and now owed them the money. And they were right – the law says I agreed to it and the debt was transferred simply by continuing to do business with the printer.

Another company had a person with zero English ring me constantly during my busiest period trying to get me to check and confirm dozens of invoices.

A third company rang me constantly to check that the printer has actually delivered the job when they said they did. And that is how they phrased it too – like they thought the printer was lying and were trying to catch them out.

Dealing with the finance companies is like getting caught up in someone else’s divorce. Messy and depressing. When one of the printers I was dealing with went broke, I received a torrent of phone calls and letters from the finance company making sure I remembered they owned the debt and telling me not to pay the receivers or anyone else who may come a-knocking.

I have some sympathy for the print shop owners. The decision to invite these finance vampires in is one they often make out of desperation. It is tough out there, and from what I have seen in other print shops over the last few months I think there is the start of a mini-recession in print happening, at least in Sydney. The lure of fast payment for a small fee must be strong.

The biggest problem though is once you invite the vampire into your house you cannot get him out. You have resorted to factoring because something is wrong with your cash flow, and now with the promise of quick cash you have compromised your ability to pay even more by adding interest and fees to your payables. You are never going to get off the invoice-factor-interest treadmill.

And then too late, you realise that not only are the vamps out for your blood, they are bothering your clients away. And make no mistake, given the choice between using a company who is factoring and one who is not your clients will run for the one who is not.

All of this makes me glad I rejected the siren song of cash flow finance all those years ago. In the end I took a small overdraft and as I built my cash up I very rarely use it anymore. I used to be embarrassed to admit that I had an overdraft, but now I am seeing how awful and pervasive the parasitic factoring companies are becoming I realise there were far worse things I could have done.

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