Hint: Alternative finance is risk vs. rewards making these mistakes can cost your business
Dallas, Texas (Free Press Release) 8/3/2012
In the last few months I have had several potential clients that have made me think and reflect on the most frequent mistakes businesses make when trying to obtain finance. Here are the 7 most common mistakes:
#1: Not Responding in a Timely Manner
I use to work under a sales manager that would tell his customers he had two sets of money “ cheap money and expensive money “ and the cheap money was running out. His whole point was that your response time tells the factor how put together one’s business is and how seriously they take the finances of their business. Obviously every business wants the cheap money but not every business’s actions show that.
When one does not promptly respond to the Factor or set time frames for information and do not honor them, they are telling the Factor several things. One, I am not that organized and this may become a problem once I become a client. Two, I really do not need the money that badly. I understand that you are busy so just when you get around to funding me will be fine. And three, it makes the Factor concerned about how they run their business as a whole, how they treat their customers and how this attitude going to affect the collateral. At the end of the day first impressions are hard to overcome.
#2: Selecting the Wrong Factor
There is a common misconception that all Factors are the same. This can lead to businesses making the mistake of classifying factoring as commodity driven instead of what kind of service does the Factor offer and do they fully understand their business’s industry. Every Factor has industries that they both like and dislike. What one may think is a no brainier kind of deal may be something that the Factor is reluctant to do or would never even consider doing.
One of the most common things a Factor tells a potential client is that we will take a look at that which translates to, if everything is perfect we will run with it. Does that sound reassuring? From there businesses don’t want to miss out on an opportunity but that may not work in your favor. Businesses need a Factor that truly understands their industry otherwise the business may receive resistance from those managing the account, not because they want to be mean but simply because they do not understand the workings of the business’s industry and they do not want to make mistakes.
All this being said, it is always in the best interest of one’s business to work with a Factor that is familiar with their industry. Ask questions about how the Factor handles situations specific to that business or industry. If they do not give a good justification for the reasoning then they are probably not the right funder. Being a guinea pig generally can cost opportunities and lost opportunities are lost revenues.
#3: Not Disclosing Everything
It never ceases to amaze me how many businesses think that they can mislead their Factor and think that they will not find out. To put it simply, tell the truth. It seems that every month I am having the same conversation just with different clients. If a business asked for a credit line for hundreds of thousands of dollars to millions of dollars, would you check their background? Of course you would check and you can be sure that companies whose business is offering this service will to. In 95% of the cases where a prospective client mislead the Factor it is purely because the prospect out right lied.
When called to the carpet on this most times the client’s response is simply œI did not think they would find out. First off, this is insulting to the Factor and gives off the impression that the client thinks the Factor is stupid. If the client is lucky the Factor will just turn around and continue with the process but at a higher rate due to the fact that the trust is gone and now more expense will go into managing the account. Reality is most Factors will just reject the application.
A good example of this came up a few months ago. A prospective client did not disclose that he had been convicted of a felony. When the Factor found out during the background check and the deal was rejected. Once the prospective client explained what happened the Factor said they would have been willing to work with the situation however since the client did not disclose it up front, the damage had been done. On the flip side, if one is honest with the Factor most issues that could come up from your past can be explained, giving the Factor a chance to get comfortable with them.
A good example of this was when I was visiting with a prospect that wanted me to know first thing that he had been arrested as a teenager in the 60’s for taking a car and joyriding with some friends. His honesty made me trust and him I wound up giving him one of the best deals I have ever given any comparable company. All this being said, a Factor will work with you if you are upfront and honest. If there is something in one’s or their company’s past that was not requested from the Factor it is still best to bring it up. At the end of the day, honestly will be reflected in the rate and deal presented by the Factor.
#4: Trying to Renegotiate with Counter Offers
This one is always tough because even if one is trying to negotiate one real offer with another real offer they still are not always comparing apples to apples. One is comparing different companies, formats, levels of service, reporting and asset requirements. The best thing one can do is let the Factors know who else they are working with and ask each one what makes them stand out against the other. If one does not disclose with who they are working with they will not get an accurate answer from each of the Factors and will most likely just hear another sales pitch.
On the other side, if one is bluffing they are probably going to get caught. Most Factors know the range of their competitors and often have good working relationships since they refer deals back and forth. So if one tells Factor A that they can get a better rate from Factor B chances are that Factor A will know whether they actually have another proposal or not.
I have a friend within the factoring industry who, if he catches a prospective client do this, will tell them that the pretend deal is the greatest deal ever, that the prospective client should take the deal, and at that time he will rescind his proposal. If the prospective client comes back, the trust is gone and he will reissue a proposal on the deal, however the pricing will be higher since now there will be more expense and time spent managing your account. The bottom line is if one has a far superior offer that is really is apples to apples, why would they go back to the company that tried to charge them more for the exact same service.
#5: Not Taking Time to Understand the Deal
Understand the differences in a factoring proposal can be a little tricky especially when one is comparing proposals from several different Factors. On the surface they could appear very close or very far apart, but when you crunch the numbers that may not be the case. Several years ago I lost a client to a competitor over a perceived savings of 0.02% totaling $600 a year.
The prospective client stopped returning my calls when they decided to go with the other Factor and I was never given the opportunity to explain my proposal which was an all in pricing structure, meaning what you see is what you get.
About three months into the client’s relationship with the other Factor the client called me to tell me how extremely unhappy they were. The perceived savings had become a huge expense and by not taking the time to understand the proposal and ask questions the client ended up spending an additional $6,000 in other fees.
#6: Not Being Informed
As a general rule, the most successful man in life is the man who has the best information “ Benjamin Disraeli. A high percentage of businesses new to factoring still have a since of confusion even after their first funding. When National Factoring Group was launched it was done with one thought in mind “ to provide a better service to both businesses in need of factoring and the factors.
We felt the best way to do this was to provide the businesses with information up front, give them the resources to understand who the factor is, service ratings of all listed factors, and a tailored search only showing the factors that work within that industry. The Factors in our organization are all experienced in every aspect of factoring.
I read a study once that stated most small businesses spend more time researching the purchase of computers than they spend researching the Factor they sign up with. In looking at data I have collected, I am sad to say I believe this to be true. Also we have noticed that there is a direct correlation between whether a business selects one or multiple factors and research done on National Factoring Group’s website through our frequently asked questions, blog and tips posting, and definitions. Those who have browsed and read these pages have received better rates and the Factors have received better approval ratings.
The bottom line is being an informed consumer; 9 times out of 10 it can only benefit you in the end.
#7: Not Sending in all Information Needed
This is probably the second most common mistake made outside of having a slow response time. After an initial conversation with the Factor they will send an application along with or containing a list of additional documentation needed. Despite popular belief, the information requested is important so that the Factor may properly assess the business and provide a working capital line. Although there will be variances between the information requested most Factoring Companies will ask for the same basic information. The quicker one returns the application and the more complete the information is the faster they will get an answer.