Factoring companies have  promoted their services in Billboard Insider.  In our recent financing poll, however, no Billboard Insider readers said they have used factoring to finance their out of home companies.  Factoring is the act of selling an account receivable at a discount to a third party which collects it.  The advantage of factoring is that you get your money instantly for the receivable.  There are three reasons why factoring isn’t widely used in the out of home business.

Quick pay – If your out of home company is carrying large receivable balances you probably have a collection problem.  Most out of home terms are pay by the tenth for the month.  And in a world of credit cards and ach there’s no reason to major receivables except if you are dealing with ad agencies.

Cost – A typical factoring discount is 1-5%.  May not sound like much but it’s way more expensive than bank financing.  Let’s say you pay a 2% discount to your factor.  That means you transfer a $1 receivable to your factor for  $0.98.  If the receiveable is collected within 30 days the cost of the financing is 24% on an annualized basis.  Much better to use an 8-10% bank line to fund your receivables.

A weaker relationship – When you factor a receivable a third party is collecting it.  If the third party does something to make your client angry then you’ll hear about it and your ability to do future business will be damaged.

We’ll discuss lease financing, private debt and bank financing in future posts.

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