The 4 Myths about factoring

Factoring tends to be widely misunderstood. It is not a ‘traditional’ lending arrangement and most businesses owners have limited exposure to factoring, if any at all. Because of this, there are many myths and misconceptions about factoring I hope to dispel here.

Myth #1

The most widely accepted myth is that factoring is too expensive. There is some truth to that statement; 2 to 6% over 30 days is a lot. However, there are many ways to offset this cost. Using the funds to complete deals that otherwise would have not been financially possible is the best use of factoring funds. In this case you are increasing your profits as a direct result of factoring. If your business is already at capacity and cannot take on new sales, it means your business needs to grow. Factoring is ideal for growing companies as it provides flexible financing that grows with your business. Factoring funds can be used to purchase new equipment, hire new employees or open a new location, all of which can increase your long term profits. Factoring can also allow you to take advantage of volume and/or early payment discounts which can affectively off set the factoring fees. Bottom line is when factoring funds can be put to good use, it is expensive not to factor.

Myth #2

Another widely held misconception is that factoring is the lender of last resort. While it is true that factoring can be an affective way to get money in emergency situations, it is hardly the only use for factoring funds or the only reason why factoring would be used. A factoring arrangement is a way for businesses to get financing without assuming debt. This means when a loan is actually needed, the books are clean of debt, making them look less risky to banks and improving their chances to get approved. As well, the business might not want to have the fixed debt service that a traditional loan requires, and turn to factoring as a way to avoid that constant expense. A small business might also look at the added benefits in terms of collections and accounting as a way to outsource key operations. Point being, there are many other reasons to use a factor besides being in a cash flow crisis, which means factoring is not solely a lender of last resort.

Myth #3

The next myth is that factoring invoices will make your company look weak to your customers. This myth stems from previous myth so its basis is already disproved but let’s take it a step further. As described above, factoring is perfect for growing companies; therefore factoring might be a sign of growth, not weakness. Further, factoring is used in some industries such as manufacturing, distributing, apparel & textile, trucking, and temporary staffing, no matter how big the business gets. Suppliers of huge retailers like Costco, Target, and Walmart regularly factor invoices as well. An assumption that a company is in bad financial shape simply because they are factoring invoices is an irresponsible assumption to make.

Myth # 4

The last myth is that a factor will be too aggressive in collections and ruin your relationship with your customer. Ask yourself, why would a factor ever want to do that? First of all, it’s more work for them to hound your customer for payment. Second, it’s in the factors best interest that your business makes as many sales as possible; ruining customer relationships is a huge step backward. Also, how many clients do you think a factoring company will keep if that is their standard procedure? The reality is that the factor will be very respectful of the relationship you have built with your customers. The factor will work hand in hand with their clients to resolve all issues in a manner that works best for everyone involved. Ruining your hard earned customer relationship is not on the agenda.