Factoring as an Alternative Investment Option for Retirement Accounts

Factoring as an Alternative Investment Option for Retirement Accounts

Advisors are discovering factoring is more than an alternative financing tool for business clients.  It can be an attractive alternative investment option for clients when rebalancing and diversifying their portfolios. 
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Factoring accounts receivables, in industries such as medical, transportation, staffing and manufacturing receivables is increasing as a means to managing cash flow for businesses especially in a tight credit market.  For some business owners, standard bank financing is no longer an option and it can make the difference between making payroll and paying vendors or filing for Chapter 11.  At the same time, investors are seeking alternative investment options to offset recent volatility in the market.  This win-win strategy for your business clients and individual investors makes factoring accounts receivables an attractive option worth further consideration. 

Factoring Benefits for Your Business Clients:
While some may think that firms using factoring are in a weakened financial position, even the most efficiently run businesses need short-term capital as their business evolves. Obtaining financing for capital expenditures or operational needs may not be a challenge for your business client, but being able to cover employee payroll or a more immediate expense may be while waiting for receivables due in the next 30-60 days. And, as accounts receivable financing is not a loan, the business will not add debt to their balance sheet. 

According to David Reyes, founder of Reyes Financial Architecture Inc., businesses are using this alternative financing to increase sales by replenishing necessary inventory; providing liquidity; and improving financial ratios, often to comply with bank loan covenants. “Factoring is also more flexible than bank lines which impose restrictive financial covenants, profitability standards, line fees and line usage requirements,” says Reyes. “Many companies use factoring as a secondary financing tool.”

Factoring Benefits for Your Clients:

Gaining attention in the alternative asset segment, factoring accounts receivables presents an asset-secured option for clients interested in portfolio diversification, potentially higher returns that may be available than other investments, and investment in low correlating  assets. Now think about how this can impact your client’s retirement account asset allocation strategy. 

“For the investor, factoring is an attractive alternative for self-directed IRAs because it offers a high yield with secured principal and strong fundamentals,” says Reyes.  “
“Deals are typically structured to provide sufficient ‘asset coverage’ to protect against the possibility of non-payment by the account debtor.”  Reyes cites the following protection measures that can contribute toward this investment’s low risk profile:

• Natural diversification as funds are spread across multiple account debtors
• Account debtors are screened for creditworthiness and monitored
• The asset coverage protects the principal invested
• All relevant assets and collateral have UCC-1 security filings (first in line)
• Recommended factors employ strict verification procedures (anti-fraud)

Using a Retirement Account to Invest in Receivables
Retirement accounts that can invest in alternative investments include Traditional and Roth IRAs; SEP, SIMPLE, 401(k), Solo 401(k) and Roth 401(k)s as well as HSAs and CESAs.  Once your client has an account established and funded at a custodian that can hold this type of asset, the client identifies their factoring investment. What makes a good factor or opportunity?
Reyes shares “We only recommend investing with factors that have a proven track record, strict internal controls and systems, transparent reporting, and that allow administrative oversight which includes regular audits, verifications and reconciliations.” 

Once the investment is identified and funds are required, you or your client completes the appropriate documentation to request funds and process the investment. You and/or your client now control the buying and selling process of the investment. (Reminder: When investing in alternative assets with retirement accounts all expenses and profits related to the investment must come from and back to the IRA through the custodian and not directly to/from your client.) 

As the credit market continues to narrow for businesses and investors demand options outside stocks and bonds, accounts receivable factoring can be a viable option for all parties, business owners, investors and their advisors working diligently to rebalance their retirement fund portfolios.