As the eyes and ears of a Factoring/Financing company, it is interesting to be involved and surrounded by new terminology, as it is in any industry.
My dilemma today was, when I participated in a conference call, to describe a factoring “lock box” through the funding bank.
Here was the dilemma:
This particular company is working on a contract with us that involves the purchase of their accounts receivable. Clients were concerned that their clients would know that they would be going through a secondary finance company, which is advancing them money.
This is where I would like to intervene. Factoring is one of the oldest and most basic ways of obtaining financing outside of a bank. It has been used for centuries, if it weren’t for factoring, there would be no clothes on your back, because that’s how the garment industries started. It is a widely known option used by small and large business owners. Try to find an industry that is a retailer or sells a good that does not use some form of trade financing or factoring. So, in summary to my soap box tirade, there should be no concern that someone knows that you have a factor that buys your receivables.
Back to the story…
While we were in the middle of this conference call, my manager was trying to explain this fraud deterrent system called a “lock box.” If you are in the industry, you will know that one of the 4 most common forms of fraud committed is when a customer fails to present or notify the factoring company of an invoice that the creditor had already purchased.
My superior did an excellent job of avoiding the “F” word (keep your mind off the gutter, I mean fraud) and told them that it is simply a process to show us and the bank verification that your checks are coming through. through and that the money he had promised is not being lost in translation.
To put it briefly, a “lock box” is a system where all checks are placed, a photo is taken, and so all parties involved can see what and where the money is being handled and sent, as a security measure. . for the money that is lent.
This approach may not be the most attractive for all companies. An example of that would be a high-profile client, who wants to free up some cash, but doesn’t want their clients to openly know about the invoices they’ve sold to the creditor. The safe deposit box makes this information available to the client and it can be seen as a blow to the client, but it is not, it is just another way to release capital.