Factoring as an Alternative Investment

by David Reyes Jr., Founder of Reyes Financial Architecture Inc.

Factoring is an attractive alternative investment for Self Directed IRAs. It offers high yields with secured principal and strong fundamentals. Accordingly, it can be a very appropriate investment/asset class for Self Directed IRA’s.

What is Factoring?

Simply put, factoring is when a finance company (factor) purchases its client’s Accounts Receivable at a discount. It is a multi-$billion industry which is little known but widely used. Companies use factoring for the following reasons:

• Increase sales, by replenishing necessary inventory
• Provide liquidity, without incurring debt or selling equity, and
• Improve financial ratios, often to comply with bank loan covenants.

Factoring is more flexible than bank lines which impose restrictive financial covenants, profitability standards, line fees and line usage requirements. Many companies use Factoring as a secondary financing tool.

Investor Considerations and Safeguards

Factoring is a form of asset based finance, whereby the principal employed is secured by assets. Deals are structured to provide sufficient “asset coverage” to protect against the possibility of non-payment by the account debtor. The following protection measures contribute towards 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)

How Does My Client Invest in Factoring?

Investors participate alongside Factors, or finance companies. However, selecting the right Factor is an important process. We only recommend investing with Factors that have: a proven track record; strict internal controls and systems; transparent reporting and will allow administrative oversight, which includes regular audits, verifications and reconciliations.

Conclusion and Summary

Investments are fixed income, monthly interest payments, with typically a minimum 12 month term. If done properly, investing alongside Factors can be a solid investment opportunity that offers high yield while securing principal and controlling risk.

Disclaimer: Equity Trust is a passive custodian and does not provide tax, legal, or investment advice. It does not endorse or recommend any contributor, company, or specific investments. Any information communicated by Equity Trust Company is for educational purposes only and should not be construed as tax, legal, or investment advice. Whenever making an investment decision, please consult with your legal, tax, and accounting professionals.