Accounts Receivable Factoring: Separating Fact From Fiction

Now more than ever, accounts receivable factoring is a excellent business financing solution for many companies in search of a stable and flexible source of working capital. But unfounded myths continue to circulate that cast business factoring in an unfavorable light to the detriment of business owners and entrepreneurs who let this fiction get in the way of taking advantage of the many benefits receivables factoring provides.

Your business success is the direct result of the many decisions you must constantly make, and those decisions, in turn, hinge on the quality of information that guides them. Decisions made about business financing are about as important as any you will ever make, so it is essential that you gather all the facts and that your judgment not be impaired by myths.

Make no mistake: Business factoring is no panacea and it may not be the right solution for your company. But debunking some of the more common factoring myths will allow you to make an educated decision when it comes time to face the crucial financial choices that every business owner will sooner or later have to make.

Fiction: Accounts receivable factoring is an expensive business financing option.

Fact: A common mistake many business owners make in evaluating receivables factoring is attempting to equate factoring fees with interest rates on loans. Business factoring fees are not equivalent to annualized interest rates on loans. For example, if a factoring company charges a staffing agency owner 3% per month, it cannot simply be translated into 36% APR. Rather, a factoring firm’s fees stop the day an invoice is paid. Staffing firms do not typically wait 12 months to receive payment on an invoice, so the fee is not nearly as large as one would perceive it to be.

Fiction: Business factoring requires a long-term commitment.

Fact: Unlike a bank loan or a business line of credit, most factoring companies do not require a long-term financing commitment. Finding a flexible factoring program that allows you to choose when, which customers, how much and how long to factor your invoices is not difficult.

Fiction: My firm’s business model is too complicated for factoring companies to understand.

Fact: Accounts receivable factoring has been in existence for centuries. Factoring companies are now working in nearly every conceivable industry throughout the world. Chances are that you will find multiple factoring companies that are familiar with the nuances and intricacies involved with your business regardless of how unusual you think it is. As a result of their long history and accumulated expertise, factoring companies are quite sophisticated and many have specialized funding programs specifically geared towards certain industries.

Fiction: I will lose business because my customers are not familiar with receivables factoring.

Fact: Even though accounts receivable factoring might be new to you, because it has been around such a very long time, it is more well known than you might expect. In fact, many major corporations have benefited from it, including: 3M Corporation, Best Buy, American Express Company, Motorola Inc., CVS Corporation, and Foot Locker. In addition, factoring financing is a mainstay in the manufacturing sector as well as specific industries, such as temporary staffing. In most cases, business customers will see your decision to factor invoices as prudent financial management on your part. The only difference for them is a change of address for remitting their payments.

Fiction: By factoring invoices, I give up control of my accounts.

Fact: Business factoring makes it easy for companies to manage their receivables. Thanks to modern technology, most factoring companies can offer their clients 24/7, “real-time” access to detailed reports on the status of factored accounts. In most cases, rather than losing control, factoring clients benefit from enhanced controls provided by the sophisticated information management capabilities factoring companies give them as part of the service.

Fiction: My customers will think my company has financial problems.

Fact: This outmoded perception has been discredited by the widespread acceptance of accounts receivable factoring as a prudent financial management technique. Healthy businesses – including quite a few in the Fortune 500 – looking for every possible competitive edge, now use receivables factoring to strengthen their financial position, which puts them in a better position to serve their customers. In short, given this explanation, most businesses will view your decision to factor receivables not as evidence of weakness but rather as shrewd financial management.

Fiction: My customers will be bothered by frequent collection calls.

Fact: Any responsible invoice factoring company will initially contact its clients’ customers to verify that the legitimacy of the invoices it is presented for funding. Normally, verification is a one-time phone call, and if collection problems ever occur, the factor will first contact the business owner or financial manager to discuss the issue.

Too often, these pervasive myths engender fear of accounts receivable factoring, driving business owners away from one of the most powerful and flexible financing tools available today. If you know how to factor and can separate fact from fiction, you are in the best [possible position to objectively evaluate the suitability of business factoring for your company.

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