According to Trade and Receivables Finance, the global factoring industry has eclipsed the $3 trillion mark. That’s trillion with a t. In the Untied States alone factoring is approaching a $100 billion industry. Even though factoring helps thousands of companies every year, some business owners have a negative perception regarding the practice. Financing receivables has been around for centuries yet somehow there is misinformation regarding its benefits and drawbacks. This article will debunk these myths.
Debunking Factoring Myths
Myth 1 : Factoring is only used by Small Start-up Companies
While factoring is a solid means for a company to grow at a faster pace, many mid-sized and large companies use factoring as well. Established companies may opt for a line of credit but when that line of credit is not high enough to meet the demand of customer orders, established companies will often rely on the benefits of factoring as it is a quick, easy path to fast cash.
Myth 2 : Factoring is too Expensive
Perhaps the most common knock on factoring is that it costs more than its funding counterparts. This may or may not be true and depends not only on the factoring company you use but also on the creditworthiness of your customers. Many factoring companies offer rates that are competitive with bank loan rates but be sure to shop around and negotiate fees. If you currently accept payments via credit cards keep in mind there is a roughly 2.5% to 3% processing fee that should be taken into account when considering factoring costs.
Myth 3 : You must Factor all Invoices
This myth cannot be further from the truth. While a factoring company expects a somewhat consistent flow of invoices from your business, few require all invoices. Businesses should choose to factor those invoices from customers that have a history of waiting the full term to pay or those customers who make up a large portion of the receivables.
Myth 4 : Only Failing Businesses Use Factoring
Using common sense here, factoring companies are not in the business of bailing out a failing company. Factoring companies prefer to work with businesses that have reliable, creditworthy customers that are capable of paying outstanding invoices.
Myth 5 : All Factoring Companies are the Same
There are hundreds if not thousands of factoring companies that operate across the Untied States. Do your due diligence. Like any other industry out there, some factors are small and some are large. Some provide poor customer service. Some use outdated technology and charge higher fees. Some are local while others are national. Take the time to research multiple companies to help you determine which is best for your needs.
Myth 6 : Your Customers will be Upset if you Factor Invoices
Factoring is becoming more and more popular in the Untied States each year that passes so most customers probably already know about invoice factoring. If your customers have questions, your factoring company should be more than helpful in answering them.
Myth 7 : Factoring is only a Short Term Solution
While some businesses utilize accounts receivable financing as a short-term financing tool, plenty elect to utilize it both year round and as a long-term solution. Most factoring companies are flexible with rates and fees and can be adjusted as a client builds more monthly volume. Some companies will offer lower fees and more competitive rates if a client does decide to operate on a long-term basis.
A Small Leader in Business Lending
CapitalFront was launched with a simple premise – create an easy, accessible and rapid process for small and mid-size businesses to fund their growth. CapitalFront strives to bring a wide array of financial products, including merchant cash advance, receivable financing, factoring, SBA lending and fixed rate term solutions, to independent business owners nationwide. Call today or fill out our online application.