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Factoring: Building a Stable Human Capital Platform

Date: Sep 24, 2014 @ 07:00 AM
Filed Under: Factoring

Factoring is very much like a three-legged stool. If the legs are uneven, it becomes unstable. Worse, if a leg breaks, the stool tips over and crashes to the ground. The three legs of our factoring stool are money, sales, and portfolio management.

Every factoring company has the same green money. While it might come from many different sources, your customer does not care where it originates, only that it is there when they need it – which is usually right now, today. Therefore, the only two things that differentiate you from all of the other sources who have the same green commodity are sales and operations. Additionally, both of these legs are heavily dominated by another type of capital (or so it has been coined in the last ten years) - “Human Capital.” I have never been a fan of this term and yet as factoring is a capital (money) intense business, it is also true that it is a human capital intense business as well. Let’s explore these two very distinct legs of our factoring stool.

We will begin with sales. If there are no sales, there is no need for neither portfolio management nor money. Sales in many industries have been revolutionized by the Internet and while factoring has been affected as well, it is still very much a people-driven sales model. In other industries, e-blasts, pay for click and other web driven methodologies have literally taken the place of a human sales force. In some factoring niches, methodologies like radio advertising, mail outs, telemarketing call centers, fax blasts, and magazine ads have been tried with limited success.

Our factoring industry is still very much a Business Development Officer (BDO) driven sales model for the following reason: sales are a two-tier process. The first tier is for a BDO to develop referral relationships with business and commercial bankers, CPAs, bankruptcy attorneys, turnaround management specialists, consultants, brokers, equity sponsor groups, angel investors or other sources. You cannot automate these relationships; you have to develop human connections. These referral sources (1) have the ability to recognize a company who has a cash-flow dilemma, (2) do not have the ability to directly help that company overcome the dilemma but (3) have a desire to see the company succeed. I cannot think of any company that is beating down your door begging to pay 20% APR for your money unless there is at least a hint of distress. Additionally, as this happens (and sometimes happens rapidly) the BDO and factor standing right there with the solution to the challenge are usually the ones who will get the sale as this industry is absolutely built on a company’s pain driven decision to pay a higher cost for a cash-flow solution.

The second tier of the sales process is for the BDO to provide a great solution in a quick, friendly, and helpful manner. If things are handled incorrectly or sloppily, the referral source will surely find another source the next time around. Remember, in most cases these referrals sources are not paid for their efforts in cash by the factor, but by the relationship to either the company being referred or the BDO to whom the referral is made.

It is for this reason the compensation model for BDOs consists of a base salary plus a commission on fees generated over the life of the deal. Many factoring company owners have tried numerous different plans over the years: commission only, lower base and higher commission, a bit higher base (or sometimes not higher) with commission only for the first year of the fees generated. These variations have not worked and the vast majority of the highest producers are paid with a somewhat lucrative base plus a commission rate based on fees generated over the life of the transaction, car allowances, travel and entertainment expenses.  I have heard many complaints about this model over the years and as someone who absolutely only eats what he kills, I am sympathetic to the owners’ complaints. However, I would also say this situation was created as a result of what is being paid; the market dictates salaries and commission structures. As long as your competitor is willing to pay this type of package, it will remain prevalent in the factoring industry. Additionally, I think we would all agree that the top producers are worth every penny of the monies expended and it is the non-producers that drive the dissatisfaction with the compensation model.

The ranges for these base salaries and commission structures cover a wide spectrum in both categories. On the base salary component, depending on the commission structure, the current market is $50,000 to $60,000 on the very low end (almost entry level) and tops out around $120,000 on the high end. The most common bases tend to be in the $75,000 to $90,000 range.  The commissions again are all over the board but for the most part cover the life of the deal and range from 4% on the low side to 8% on the high end.  This does not mean there are no commission plans above or below this range, but most plans tend to be in these ranges.

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