Necessary Evil or Inherent Good? Credit Card Payments and the Factoring Industry

Accepting invoice payments with a credit card can create a win-win situation for factors and their clients. David Powers of Clarus Merchant Services outlines the rationale behind why factors should accept this form of payment and how they can find the right account provider with which to work.

BY: DAVID POWERS, ACCOUNT EXECUTIVE, CLARUS MERCHANT SERVICES

More and more factoring companies are finding that debtors want to pay invoices by using a company credit card. This is a positive development for the industry, as it gives factoring companies another option to increase revenue. However, for those new to this form of payment, the question most often asked is "Do a lot of companies use a credit card to pay bills and why?"

Why Pay with a Credit Card?

Companies pay expenses and invoices with their company credit card for a lot of the same reasons people use their personal credit cards, including miles, rewards, perks, cash-back, discounts and more, as most business credit cards offer lots of member advantages and perks that can be a great asset for any company.

For example, racking up a lot of points or airline miles by using a business card for expenses can help offset the cost for business travel. Another great perk companies can take advantage of are cash-back programs, which are offered by most business card providers. This type of program helps with paying bills, procuring inventory, equipment purchases, employee rewards or whatever else for which a business may want to use the program. The key is the more you use the card, the more rewards or cash back you get.  

Another major benefit of using a business credit card for companies is its effect on cash flow. By using a credit card instead of a cash, check or Automated Clearing House payment, a company basically has an interest free loan as long as the credit card bill is paid on time every month. This gives the business more cash on hand as well as a longer "grace" period in which to pay its expenses. In addition, by paying the credit card bill on time, the business will effectively raise its credit limit while increasing its business credit rating, allowing for more purchasing opportunity and flexibility.  

Bookkeeping also can be simplified by using a company credit card. There is a clear and concise paper trail, making expense reconciliation transparent and easy.  

For factors, the benefit of accepting company credit cards as a form of payment is simply that it provides for increased revenue.  By giving debtors more options and convenient ways to pay their invoices, factors can attain an increase in cash flow, a decrease in late or no-pays and a more effective option to collect on past due receivables.  

Factoring vs. the Credit Card Industry

Over the last four years, the credit card industry has taken a negative look at the factoring industry because the credit card industry bases everything on risk and currently views factoring as taboo and very high risk because, labeling it as “bad debt collection.” Of course, that is not what factoring is, but at this time, that is the general feeling in the credit card processing world, making it all but impossible to get set up to process credit cards from providers like American Express, Mastercard and Visa.  

Due to their perceived business model as well as the high average transaction amounts, more and more factor accounts that were open and active are being closed down. In addition, some transactions are being delayed for months. This not only hurts the factors but the debtor as well.

On the other side, some factors view credit card processing as a necessary evil, feeling as if they need to accept this system to stay competitive while also gaining another revenue stream, but it can be complicated and, as mentioned, almost impossible to do.  

Finding the Right Provider

Accepting credit cards definitely helps offer more options to debtors to make their invoice payments and can lead to more money for factors. The roadblock to this symbiotic relationship is setting up an account to begin processing the large volume and transaction amounts that are common in the factoring industry. To ensure a smooth set-up process so they can reap the benefits of accepting credit card payments, factors should consider the following when choosing an account provider:

• Do they know and understand the factoring world? After all, it is a truly unique industry far outside the normal retail arena.

• Can they provide you with an American Express account along with MasterCard and Visa?

• Look for a company that does its own underwriting, that way they can ensure a much better chance of approval and account stability.

• Make sure they list you with the correct SIC (standard industrial classification) code. Some processing companies will post an incorrect code for approval, which may result in accounts being closed.

• Lastly, most factors pass off some or all of their processing fees to their clients and/or debtors. See what programs are available to help make this process easier.  

David Powers is an account executive with Clarus Merchant Services, a preferred vendor of the IFA. Clarus Merchant Services has been working with the IFA and its members to develop a customized credit card processing program designed specifically for the factoring industry. Powers can be reached at 540-222-3925 or dave.powers@clarusdc.com.