What is 'Factoring?'

We are frequently asked by our clients what this term means, and how the concept of factoring can be a used to create investment returns greater than what they currently receive from their GIC's and underperforming market based investments. Here's the answer...

When you go into retail stores such as Canadian Tire, Costco or Walmart, you will see the concept of 'factoring' when you browse the store shelves.

Let's say you see a pair of rollerblades on the shelf of a typical 'Big-Box' store. There is a process that the big box store follows when ordering and taking delivery of those rollerblades from the rollerblade manufacturer.

1) The Big Box Store will issue a purchase order to the rollerblade manufacturer for a certain number of rollerblades at agreed upon prices and terms.

2) The Manufacturer will produce and deliver the rollerblades as per the details of the purchase order.

3) The Big Box Store will take receipt of the rollerblades, and will pay the invoice (as per the purchase order) to the manufacturer 60 days after receipt.

The Problem? Most manufacturers cannot make a large quantity of product, pay their staff and deliver the product without being paid at the time of delivery. The life-blood of a business is its cash flow, and 60 days without getting paid for large orders is just not feasible. So, not wanting to miss out on an opportunity to have their products showcased in a well-known, successful Big-Box store, they will use a " Factoring Company" to make it possible.

The Factoring company, after doing it's Due Diligence on both the Big Box store and the manufacturer, will "purchase" the invoice for the rollerblades, and will immediately pay a portion of the invoice to the manufacturer, so it can keep operating. 60 days later, the Big Box store will pay the full invoice amount to the Factoring Company, who in turn will pay the remaining balance, minus a commission, to the manufacturer. This commission is how the factoring company makes it's profits.

The manufacturing company is happy that they were able to fill a large order for their product, even though they had to pay a commission, and the Big Box store would be able to sell some if not all of the rollerblades with the 60 days that the invoice is due for payment. (Cash Flow!). Factoring is a very common concept in the retail world. It is estimated that up to 85% of products on the shelves at Big-Box stores are using some form of factoring! In fact, the world-wide factoring market is worth over 1.5 trillion dollars annually!

StoneTower Financial is proud to offer Factoring sector investment opportunities to our clients. Talk to us about our one year investment opportunity with an 8% return on investment available now. This investment is RRSP and TFSA eligible, meaning your 8% investment returns can either be tax-deffered (in your RRSP), or tax free (in your tax free savings account)!

See Also:

Media and Articles