Liquidity and the Factoring of Consumer Contracts

In a social setting, I am sometimes asked, “What is it that you do?”  I usually reply something to the effect of, “Well, I own a brokerage business in the factoring industry”. I try to keep my explanation as simple as possible. The person to whom I am speaking usually nods their head politely, and we move onto another topic.

However, if the person to whom I am talking is a business owner and sells products or services to consumers, I will ask if he needs financing for his subprime customers. Usually the business owner has financing available through a retail installment contract for his "A" credit customers, or his "A" credit customers can easily find consumer financing on their own.  But usually I hear that there is not financing available for his/her less creditworthy customers.

Generally, the business owner is interested in consumer receivable financing for his less creditworthy customers.  So then I usually ask, “Would you be interested in not only providing credit for your sub prime customers, but also being able to cash out your retail installment contracts and receive immediate cash rather than slowly receiving monthly payments for the next year or two?”  The answer is usually yes.

So when asked, “What is it that you do?”  I could say something to the effect of, “I help businesses who sell products or services directly to consumers to realize market liquidity through assets such as their consumer notes.”

Liquidity involves the trade-off between the speed of the sale of any given asset and the actual price which any given asset can be sold.  The reason a business owner will answer yes to whether or not he/she would prefer to be paid sooner rather than later is because they understand that by increasing their cash flow, they can increase their profitability.  Oftentimes, small business owners are not aware of the possible high degree of liquidity of their consumer contracts.

However, liquidity also implies the concept of selling an asset without causing a dramatic change in the asset’s price.  When a business owner chooses to sell their retail installment contracts, they do so at a price.  There is a discount charged for the service of assuming the risk associated with waiting to be paid monthly over a period of time.  There is sometimes also a refundable reserve which is held back to further mitigate against the possibility of loss to a funding source, who is purchasing the consumer receivable.

An asset such as a consumer note’s market liquidity is a relative term.  It is related to the business owner’s perception of whether the discount and reserve associated with the sale of their consumer receivables reduces the price of the receivable a significant degree.  Any business owner is the best judge of this question.  However, consumer receivable financing works best in an environment where the profit margin is large enough that the business owner is comfortable with the costs of factoring their consumer notes, due to their enhanced cash flow as it relates to profitability.

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