Invoice factoring is leveraged by businesses across the globe as a way to get a quick cash injection when needed. However, it’s also one of the most misunderstood financial options on the market today. We’ll go over some of the most common misconceptions about factoring and break down what it really is, and how it works.
“Factoring is Expensive”
There is a generalization about factoring that
is expensive. In some cases, it can actually save a business money, but to
understand the breakdown, you have to look at how factoring works.
When you work with a factoring company, you’re selling your unpaid B2B invoices to that company, known as a factor. The factor then gives you a large portion of the value of the invoice right away and takes care of invoicing and collecting from your customer. Once the customer pays, you receive the remainder of the invoice value, minus a nominal fee. The fee varies based on the terms of your contract.
Usually, the more you factor and the larger each invoice is, the lower the fee tends to be. That makes sense. After all, your factor is collecting the payments, and it takes more time to collect 100 $1,000 payments than it does to collect 10 $10,000 payments, and it takes way less time to collect a single $100,000 payment than either of those options. Yet, in any of these cases, you’re also doing away with all the traditional costs you’d have with invoicing and collecting when you work with a factoring company. So, even if the rate is a little higher than other cash flow solutions, it might actually work out to less when you consider all the things you stop paying for.
“Invoice Factoring and Invoice Financing are the Same”
This is one of the biggest misconceptions. Both factoring and financing are ways to get a cash advance on your unpaid invoices. However, financing is a loan. You have to pay the lender back every penny you borrow with interest. Your invoices serve as the collateral for the loan. Invoice factoring is not a loan. It’s selling your invoices to a third party, so you get your money without incurring debt.
“I Can’t Factor Because I Have Bad Credit”
Again, factoring is not a loan, so getting approved for it works differently than loans do. Instead of being concerned with your credit, the factoring company will be concerned with the credit of the companies which owe you money. In fact, they’ll actually perform diligence checks to ensure your customers can pay their invoices before they purchase them from you.
“Factoring Companies Tell You Who You Can Do Business With”
Another myth. Many people believe that because factoring companies will not purchase invoices for debtors with bad credit, that they dictate who you can and cannot do business with. That’s not true. As a general rule, you can continue to do business with anyone you want to do business with. However, if your factoring company gives you the heads up that your customer potentially doesn’t have the finances to pay you for your services, it’s probably in your best interest not to do the work. You can still do it, but you’ll be assuming the risk if the customer doesn’t pay.
“Companies that Factor are in Financial Trouble”
Factoring fills a unique lending gap. Many companies cannot qualify for loans because they’re too new or haven’t established credit yet. Whereas larger, more established companies will leverage loans and lines of credit regularly, small businesses and startups often cannot. That doesn’t mean they’re in financial trouble at all. It just means they need to bridge gaps in different ways. Also, some companies work with factoring companies because of the additional services they provide. In this way, they get additional administrative support in addition to their money.
“My Clients Will Think Poorly of Me if I Factor”
There’s often a worry that integrating a third party into the invoicing and payment process will damage relationships. This could be a valid concern depending on which factoring company you choose. However, factoring companies are becoming more and more popular among businesses looking for cash flow solutions. In choosing a factoring company, it is important to partner with one that understands that they are working as an extension of you and your office. You want to make sure the company is reputable, well-established and has a professional approach to customer service. This can improve the level of service your customers receive.
“If I Do it Once, I’m Tied in Forever”
Depending on your agreement, you can often decide which invoices you factor and how often you factor them. You could, in theory, get signed up with a factoring company right now and then never use their services at all. Or, you can keep the option in your back pocket for later and call upon your factoring company if you have a lull in business or need to purchase new equipment. Or, you could use their services right away and then stop a month or two down the line. Really, it’s whatever works for you.
Dispel Your Factoring Myths with an Instant Factoring Assessment
Interstate Capital is a leading invoice factoring company. We help businesses just like yours solve their cash flow issues every day. If you still have questions about whether factoring is right for you, get an instant online factoring assessment.