Whether your business is in a cash crunch, you need funds for expansion or you simply want to get paid for your goods and services sooner rather than later, factoring, or invoice financing, can be a viable method of receiving much-needed funds. By selling the invoices that have payments due, you can access cash immediately and reduce the stress of having to wait for your customers to pay. Factoring does come with some common misconceptions or myths. Let’s take a look at each to discover if factoring makes sense for your business.
Many companies avoid factoring because they do not understand what it truly entails or they have heard myths such as “Factoring means you’re about to go out of business.” In a time when banks have tightened their lending standards and it’s becoming more difficult for businesses to access the money they need to grow and operate, factoring is a convenient and effective form of raising capital.
If you are hesitant to look into accounts receivable financing, consider whether it is because of one of these five reasons. If it is, you owe it to yourself — and your business — to give it another look.
Factoring Means You’re About to Close Your Doors
Many businesses look at selling their accounts payable as a last resort when they cannot get financing anywhere else and need it immediately to keep going. However, it’s important to realize that most factoring firms will not take on the invoices of a failing company; they only want invoices from customers who are going to pay. They aren’t in the business of purchasing bad debt. If you have a solid customer base but can’t wait 90 days to get paid, factoring can get you the financing you need in order to grow.
Factoring Will Cause You to Lose Customers
Because of the misconceptions about factoring, some companies or individuals assume that when their accounts are taken over by a factoring company, the vendor is in trouble. They may react by taking their business elsewhere. However, some factoring companies are changing the way they do business and communicating with customers using the vendor letterhead. As a business, when customers have questions about factoring, reassure them that the reason you’ve taken this path is to grow your business, so you’ll be around to service them in the future.
Factoring Is Expensive
While invoice financing does include costs such as service fees, in most cases it actually costs less than a traditional loan that comes with interest and fees. In the long term, factoring can save you money, since you’ll be able to pay your suppliers more quickly and earn more favorable terms. You’ll also avoid using your credit cards or personal savings to pay bills, or having to offer your personal property as collateral on business loans.
Factoring Means I Have to Give Up My Company
When you sell your outstanding invoices to a factoring company, you are only selling the invoices and nothing else. Your business is still yours, only now you have more funding for operations. You’re simply using factoring as a viable means to raise needed capital in the moment.
Factoring Is a Flexible Form of Financing
When you have cash to operate your business, you can be flexible. However, factoring is not flexible in the same way that a line of credit or overdraft is. It’s not a rolling line of credit that you can draw on and pay off for an indeterminate amount of time. You sell the invoices that your customers have yet to pay for a set amount, which you can then use however you see fit. This has a distinct advantage over a traditional business loan, which may come with restrictions on its use. Keep in mind, though, that once the invoices are sold, they cannot be sold again. Thus, you cannot continue to draw from the same well, as you would a line of credit. You’re selling an asset for cash, nothing more.
When you are trying to grow your business, remain operational during a challenging time or simply do not have the resources to manage your accounts receivable, factoring can be a viable and lucrative option. Do not be swayed by the myths about this kind of financing, but do your research and make a decision that works best for you and your business.
About the Author
Raul Esqueda is founder and CEO of 1st Commercial Credit, LLC, in Austin, Texas. Raul has experience in funding businesses of all industries and sizes within the United States, United Kingdom and Canada and has written many articles about purchase-order finance, factoring and asset-based lending.