Factoring helps thousands of companies improve their financial situations each day. Yet some business owners have a negative perception about factoring their invoices.
There is a lot of misinformation about factoring, even though the financing of receivables has been around for centuries and is practiced in many industries. Below are six myths that cause some companies to shy away from factoring, even when doing so might stall their growth and financial performance.
Advancing cash on unpaid invoices is a proven way for a start-up company to grow at a faster pace. However, many older, mid-sized companies factor as well. The reasons are simple: factoring is quick, inexpensive and does not require a cumbersome approval process.
Some companies factor their invoices during the start-up phase, shift to a line of credit with a bank, then they go back to factoring. Why do they return? Unlike a traditional bank loan, factoring can scale up to match a company’s growth. A solid, reputable factoring provider can finance tens of millions of dollars in monthly invoices for companies of all sizes.
Myth #2: All factoring companies are the same.
This might be the greatest misunderstanding of all. Hundreds of factoring companies operate today in the United States. Some of those factors provide poor customer service, outdated technology, and lock clients into unfavorable agreements. Most factors, however, want to build long-term relationships with their clients and provide the most competitive services possible.
As in any industry, some factoring companies are better than others. If you are interested in factoring receivables, you need to put some time and research into finding the best factor possible for your business.
Myth #3: Factoring is expensive.
A common knock on factoring is that it costs more than the interest rate on a loan. That may or may not be true, depending on who handles the factoring. Some factoring companies charge various administrative fees that can add up to more than 5% of an invoice value. However, most factors offer fees that are competitive with bank loan rates, depending on the client’s monthly invoice volume.
As with any other service, it pays to shop around before selecting a factoring company. You should also be assertive in negotiating your factoring fees to a level that meets your business goals.
Myth #4: You have to factor every single one of your invoices.
This is largely false. When you enter into an agreement with a factoring company, the factor will expect a consistent, continuous flow of invoices from your business. However, few factoring companies require their clients to factor all of their invoices. Many companies choose to factor invoices from certain customers. These could be customers that make up a large portion of the company’s business or tend to wait longer to pay. The back-office services that factors can provide—from credit checks to collections support—give clients an advantage in getting quicker payments from the customers that fuel their business.
Myth #5: Factoring is a last resort for struggling companies.
Factoring is an accessible form of financing because it relies on the creditworthiness of a company’s customers, not the credit score of the company itself. That leads some people to believe than factoring is the desperate domain of either start-ups or businesses on the verge of closing their doors. That could not be further from the truth. Factors do help distressed companies, but they also want to work with clients that are successful and plan on growing at a rapid pace. As mentioned above, many established business owners could secure a line of credit with a lender but choose the flexibility of factoring instead.
Myth #6: Factoring agreements are inflexible and long-term.
Some factoring companies lock their clients into contracts that include fixed rates, termination fees and terms as long as two years. However, most reputable factors provide more flexibility than that. Fees and rates can be adjusted as a client builds more monthly factoring volume. Termination or buyout fees are usually moderate, and the term of an agreement may be six months to a year. However, there are advantages to signing up for a longer term with a factoring company. Most factors will offer lower fees and more competitive rates if a client signs a one-year agreement as opposed to a one-month term. The best factoring companies understand that providing a high level of customer service is the best strategy for retaining clients. At the same time, adjustable rates provide an incentive for clients to factor more of their invoices.