However factoring, as a service, was a bit misrepresented in this article and I would like to take this time to correct a few of the points made and add some of the glaring omissions as well.

The first misrepresentation is the point that “Dealing with a factor can also be much more difficult than with a commercial bank.” Although it is conceivable that factoring ‘can’ be more difficult, it is highly unlikely. Depending on the type of loan requested, the bank will want up to date financial statements, business plans, credit reports, detailed plans for the money, etc. and will take weeks to approve the loan and disburse the funds. Whereas a factor with a streamlined process can let you know if your business qualifies for funding in as short as two days, and can process advance requests on the same day once you are approved. The process is simple, quick and the lending arrangement is more flexible than a traditional loan; hardly “much more difficult.”

Another misrepresentation is that factoring is a more “risky alternative” to bank loans. This claim is made on the basis that the factoring industry…

“is very fragmented. Most factor financing is provided by smaller, unconventional lenders. It is much less regulated and the quality, reliability and integrity of factors vary widely.”

There is certainly some truth to this claim. Banks tend to be bigger than factors, which doesn’t say much considering the size of most banks. They are inherently unconventional because ‘conventional’ lending would of course mean, getting a loan through a bank. Finally, it is hard to pick an industry that is more regulated then banks; of course factors are less regulated.

However, the article makes a good point when commenting on the variance of ‘quality, reliability and integrity’ among factors. All this means is that due diligence is required to ensure that a business selects the trusted factoring service that is right for them. This is a very valid point.

But let’s go back to the claim that factoring is a ‘risky alternative’ to bank loans. Loans create a liability which is by definition creates additional risk. With an accounts receivable, the sole risk is that the invoice does not get paid. This is a risk that exists whether there is a factor involved or not, therefore factoring creates virtually no additional risk. Sure, there is some risk when the factor has recourse on their advances, but in the event of non payment a factor actually helps finance the loss by taking it out of future payments. Or even better, in a non recourse factoring arrangement, the factor assumes some of the default risk which actually significantly decreases the risk to the end client. Clearly the claim that factoring is a ‘risky alternative’ is generally off base.

 However the article was not completely off base and made some valid points. One of which is that factoring “is often the only way to get cash.”  This is true as businesses have increasingly turned to factoring because they do not qualify for bank loans. Whether it is because of the current lending environment or a lack of credit history or both, factoring provides much needed access to capital to businesses of all sizes and ages.

The author was also right about factoring being much more expensive then traditional loans. Although it might appear comparatively expensive, it is not realistic to price factoring against money that a business could not qualify for.

Which brings us to the next solid point made in this article: keep in end in sight. If a business is factoring purely because it does not qualify for other types of financing then it is probably best to discontinue the factoring relationship when it is no longer needed. With that said, there are plenty examples of businesses that stand to benefit from a factoring arrangement even when other financing options are available. As well small businesses can affectively outsource some key operations through factoring, creating additional value to the arrangement.

The Truth About Factoring is a post from: Factor Direct Capital