Accounts Receivable Factoring: Separating Fact From Fiction
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
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.
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
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.
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
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.
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.
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
Fiction: My customers will be bothered
by frequent collection calls.
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
and can separate fact from fiction, you are in the
best [possible position
to objectively evaluate the suitability of business factoring for your