Misconceptions About Factoring

Common Myths & Misconceptions about Factoring

The fact is, almost any business can receive funding and the rates are very reasonable, often negligible. Although more small businesses use factoring than “big” businesses. Most astute business managers use it in long-term planning and in conjuction with other revenue generation methods.

Qualifying for outside funding should speak bundles to your confidence and the confidence financiers have in your company. Business owners more than anyone understands the difficulty nowadays in securing outside funding.

Being able to have access to funds when you need it should put your customers at ease because you will be better equipped to meet their needs at any time and often on a whim. Therefore, they would not be interested in seeking another vendor.

A factor’s goal is to see you do more and continued business. Therefore, it is in it’s interest to help you succeed. It’s folly to think that factors would offend and harass customers with collection calls.

The other facts are that without direct pressure factors more often improve and enhance the collection process to the amazement of clients. This is so because most businesses realize that their ability to secure more accounts can be directly related to their credit report and references. And, factors report to Business Credit Bureaus regularly and would make accurate reporting.

Yes, I would not deny the fact that factors do and sometimes call customers, but only as a reminder. Rather than harass a customer, factors are more likely to resolve payment issues in ways that would satisfy the client.

Last but not least, that factoring is too expensive is often a generalized response given when a prospect does not yet have complete details. The cost of factoring is relatively favored compared with other financing. It varies greatly and is dependent on many conditions, not unlike a bank loan.

It’s simply another avenue for financing with its own market niche and specific price structure. Factor’s funding should not be compared to a bank loan because funds for accounts receivable financing is not considered as a loan legally and in practice. Consequently, the fees are not considered as interests. The fees are purchase discounts.

Attempting to multiply and annualize the discount rate may be well intentioned, but it is misleading.

If you borrow $100,000 from a bank at 12%, you could make monthly payments of $1,000 and in 12 months would have paid $12,000. Yet, you would still owe $100,000. If you factored $100,000 each month at 5% discount, in 12 months your fees would be $60,000. But, you would have received $1,200,000 (12 x 100,000) and the fees would still be $60,000.

What factoring does is –it is almost like converting your invoice terms to COD (cash-on-delivery), and for being able to receive substantial upfront payment, you allow a discount. The real bottom line is with better cash flow you can grow your business more rapidly and exponentially. Your profit will increase, not decrease.

Now you have real answers in matters of factoring and hopefully are more equipped to make informed decisions. However, we are not engaged in rendering legal, accounting or other professional service. If legal advice or other expert assistance is required, you should seek the services of a competent professional person.