Learn the Advantages of this Flexible and Cost-effective Source of Finance
Invoice factoring, also known as accounts receivable financing, has been around for a long time. Yet, despite the large numbers of businesses that factor their invoices, there are still many myths in circulation about this form of business financing.
One of the most common myths is that factoring is only used by businesses that are failing. This misconception is, of course, entirely untrue. Indeed, many companies use factoring to fund growth.
When a company uses a factoring service, it sells its sales invoices to the factoring company. On receipt of the assigned invoices, the factor will pay the business an advance on the face value of the invoices ranging from 80 to 95%. The customer then pays the factoring company the full amount of the invoice and the factoring company pays the business the remainder due to the business less their factoring fee.
Factoring releases most of the value of a sales invoice immediately. The process frees up working capital, smooths cash flow, and takes away the headache of accounts receivable management. Unfortunately, some of the myths surrounding factoring leads to some business owners not considering accounts receivable factoring as a finance source. Here are nine of those common misconceptions about factoring.
1 Factoring Is Expensive
Some people believe that factoring is more expensive than other forms of business financing. Invoice factoring can often be a less expensive than bank loans or overdrafts in the long-term. Factoring also frees up cash that can be used to make further cost savings, such as paying vendor invoices early to claim early settlement discounts.
2. Factoring is Only Available to Large Businesses
It is true that invoice factoring services used to be only available to larger enterprises. Today, though, businesses of all sizes can enjoy the benefits of invoice discounting. Some factoring companies do have minimum volume requirements. Still, many factors will now offer their services to small businesses and medium-size businesses.
3. You Must Have a Good Credit Rating
A factoring company is more interested in your customers’ creditworthiness than the credit rating of your business. So, even if you do not have a AAA credit rating, you may still apply to a factoring company for finance. The myth that you need a good credit rating to factor your invoices is untrue. It will be easier for many businesses to obtain a factoring agreement than to get a business loan.
4. Factoring Locks You into a Long-Term Contract
Some factoring companies do require a commitment of 12 or 24 months. However, some companies offer more flexible terms. In some cases, a factoring company will only ask for a commitment of 90 days or less. Flexible factoring agreements like these allow businesses to use factoring as a short-term financing option.
5. Factoring Companies Demand Large Upfront Fees
Some accounts receivable management companies charge a small upfront fee to cover the application and onboarding costs of a new client. The initial cost of applying for a factoring arrangement is usually minimal, and the application process is straightforward and fast.
6. You Lose Customers When You Factor Your Invoices
Switching to factoring your sales invoices is unlikely to upset any customers. Although factoring has become quite common and many customers have probably sent payment to factors before, most business people understand the benefits of factoring. So, your customers will read nothing into the fact that you have decided to factor your sales invoices.
7. Factoring is an Administrative Nightmare
The process of factoring your sales invoices is straightforward. You submit a copy of the invoices to the factoring company, and the company will process a payment for you, usually within 24 hours. Overall, factoring reduces the administrative burden of running accounts receivable. The factoring company takes on the responsibility of credit checking customers and collecting and processing customer payments.
8. You Lose Control of Your Accounts Receivable
Some businesses are reluctant to hand over the control of accounts receivable to a third party. The concern is that the factoring company might use aggressive collection tactics that could upset customers. However, modern factoring companies work in partnership with their clients and will liaise closely with you if there are any issues with the non-payment of invoices. Also, if you so choose, you can elect to retain the responsibility for invoice management.
9. All Factoring Companies Are the Same
The main reason that these common factoring myths persist is that some factoring companies are inflexible and demanding. However, factoring companies are not all the same. So, if you are looking for a way to release the cash tied up in your receivables, talk to several factoring companies before you write off invoice discounting off entirely.
The Bottom Line
Factoring can provide reliable, flexible, and cost-effective financing for large and small businesses. But, as you can see from the above, many people do have misconceptions about invoice factoring. The best advice is not to take these common myths at face value. Instead, talk to a factoring company about your financing needs, and you will probably be pleasantly surprised at what they can offer you.
About Universal Funding
Universal Funding is a private funding source that has funded thousands of businesses and more than $2 billion since 1998. We turn your accounts receivable into the funding you need through invoice factoring and can have capital in your hands in a matter of days.