Financing Blog

Factoring Myths Busted

Factoring is not a new idea in business. It dates back to the Code of Hammurabi in 1780 BCE. Jewish agents in the Middle Ages performed this service for farmer’s crops. During the 1500s in Colonial America, factors bankrolled shipments of fur and tobacco to Europe and products from Europe that the colonists needed.

Factoring is simply selling your accounts receivables for a discounted amount. It is experiencing a comeback in today’s market because it is much more difficult for small businesses to get a loan from banks. However, it has a negative connotation amidst business owners. Here are the facts that separate myth from the truth.

 

Myth #1 -Selling Your Invoices Means Your Business is Struggling

Many businesses that are thriving sell their accounts receivables to increase their cash flow temporarily. A business must have the invoices in order to receive cash against them. It is more likely that a business that is struggling will not be able to get this type of service.

 

Myth #2 – Factoring Is Expensive

No one talks about the high fees and interest rates associated with a loan. Selling your accounts receivables has fees that are competitive with other types of financing. It will probably cost less than cash advances on credit card fees. If you have been turned down for a loan, selling your invoices for a small fee is a better choice than not having the funding you need.

 

Myth #3- Your Customers May Get Angry

If your customers are genuinely concerned about paying their bills on time, they have no reason to be upset if you are using a factor for your invoices. The customers who do get angry are probably more worried about their own credit history, because now they are dealing with a larger company who will report their payment history which will affect their own credit. If your business has serious concerns about the use of a factor, the lender will take that into account and knows how to deal with your customers.

 

Myth #4- It Is Only for Large Companies

In the past, this may have been true. More small businesses are turning to the services of a factor when they do not qualify for a bank loan. If your business extends credit to your customers, your company can benefit from selling your invoices to the factor. Check to make sure that your factor buys small invoices.

 

Does It Benefit Your Business?

You are the only one who can determine if factoring is right for your business. When you need cash flow for working capital, don’t discount the idea finding alternative financing with a factor without knowing all the facts.

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