Recently a factoring client, let’s call them Acme, let us know they are getting a substantial order from a well known large corporation, we’ll call it Bluto. The amount of the order we’ll say is $1,000,000.
So Acme is happy to be getting such a large order from Bluto, but Bluto’s payment terms are 180 days – six months! Now a recent post to this blog explained why a factoring company can’t provide an advance for six months, although that is not the purpose of this post.
What Bluto is essentially doing is forcing Acme to be their lender. Instead of going out and getting their own commercial financing to have operating capital, it’s making its vendor provide it. This is what they call a “cynical ploy” to circumvent the tradition of every company be responsible for their own financial well being. Bluto will be able to live off product sales for half a year while Acme sits and waits.
It is putting Acme in an incredibly risky situation as they do not operate as a funding source, they make and sell products. Acme has to assume that when six months are up, Bluto will have the wherewithal to come up with the payment as they have been living off the product sales all along. If Acme doesn’t insist on filing a UCC-1 against their collateral (the product,) they will become a general (unsecured) creditor if Bluto decides to reorganize and seek debt protection.
Corporate Bluto’s are pushing the limits of this type of activity; it is hurting Main Street and adding another crushing blow to small businesses.