For some industries such as manufacturing, factoring is a perfect match. The two have a long history of working together due to their natural complementary business cycles. Yet other industries such as construction and agriculture have added complexities due to governmental regulations. These sectors also have numerous parties’ involved, thin margins and tend to move in peak and valley business cycles. While banks generally won’t provide farm financing due to the risks, invoice factoring companies make agriculture finance options a possibility despite the complexities involved.
Government Mandates Place a Burden on Factoring Services
The nuisance regarding agriculture, farming and getting funding has to do with the Perishable Agricultural Commodities Act (PACA) mandate, which puts priority liens in place on who must get paid first and who must wait. Factoring receivables, after all, is all about getting paid fast and PACA can run interference with this. Ensuring suppliers and growers get paid first, the intention of the law may hamper the collection of payment for others including the funding institution. Let’s look at example of how such a legal obstruction might work:
- A distributor, who buys produce from local farmers to sell to grocery stores, needs financing to fund this process.
- The distributor secures farm financing based on current invoices, but then fails to pay the growers.
- Legal mandates from PACA guarantee the grower will get paid first when the customer pays on its invoice.
- Though the farmer gets paid, this leaves the agriculture factoring company with empty pockets for now.
For this reason, farm loans and funding must be vetted more thoroughly generally on a case-by-case basis.
Better than Farm Equipment Loans
Despite these hurdles, agriculture factoring remains an attractive option to many farmers, distributors, and packers. Unlike agriculture loans, it does not concern itself with your business’s FICO score and instead focuses on your customers’ history of paying their debts on time. Such factoring companies that are familiar with the nuances of agribusiness make the best fit for producers and distributors looking for financial assistance.