Choose Factoring Companies, Not Bank Financing

Factoring Companies Provide Lower Rates, Better Services than Bank Factoring

The options for financial services continue to increase for business owners as traditional and non-traditional sources offer financing. For example, banks now compete with factoring companies in offering accounts receivable financing. However, it’s important to note that banks offer a comparable price, but a completely different experience than factoring companies.

Factoring companies came into existence centuries ago. After the British colonized New England, factoring brokers made trade between sellers in Europe and buyers in the colonies possible.

These factors would develop expertise in determining which buyers could be trusted to pay back money to the seller in Europe (vouching). The factoring brokers could then collect a fee for their credit advice. The organizations also began acting as the buyer and reseller of goods which gave them the ability to earn profit. Factoring brokers focused on earning this profit, selecting reliable clients, and limiting the risk of losing money if the buyer did not pay.

Full-service firms have modernized factoring to present-day standards, but basic services mirror those of pre-Revolutionary War times. Modern factoring companies still:

• Buy a client’s accounts receivable and offer cash advances
• Help a client minimize bad debt
• Offer collection expertise

Firms may also choose to specialize in niche markets such as staffing, trucking, and manufacturing.

Banks Impose Steep Lending Restrictions

Banks entered the factoring scene after private factoring companies showed promising growth. Banks did not offer factoring services until they saw an opportunity to charge a hefty fee. Accounts receivables have real value, but assets such as machinery or real estate can be “touched,” thus they are worth more to banks. In addition, banks also routinely seek customers with good credit, profitability, solvency, and success throughout many business cycles. Therefore, in order for a bank to grant a risky loan against accounts receivable, they are going to charge fees at four or five times higher than ordinary loans. It’s important to keep in mind that at the same time that banks charge higher factoring fees than independent factoring firms, they do not offer any kind of service above and beyond the credit line or loan.

Factoring companies offer many extra services than banks

Many extra perks accompany factor financing:

• A receivable specialist
• A collection specialist to manage clients’ accounts payable and call account debtors when payments are past due
• Credit checks and suggestions on appropriate credit limits for client’s customers
• The entrepreneur’s credit strength is not a disqualifier.
• Services are fast with advanced payments reaching an owner’s account within 3 to 5 business days.
• No loan committees.
• Same day funding decisions for some clients.

Most factoring companies will provide unlimited credit on all eligible accounts. Only the invoices pledged when dealing with factoring companies are accounted for, meaning other assets are available for alternative forms of financing.

Banks insist on more restrictions, higher fees

Banks prefer customers with good credit and sustainability while subjecting them to slow, inconsistent credit checks. Loan committees, auditors, and bank regulators must approve clients’ factoring transactions. Specializing in a risky industry or not providing profitability may disqualify clients from bank factoring.

Banks also lack expertise in setting credit limits meaning owners are exposed to risk with limits set too high or their business is restricted with limits set too low.

Banks may restrict credit lines for business by:

• Offering a loan worth a fraction of the value of its accounts receivable. The terms of the transaction may require all of its assets, including equipment and inventory, to be used as collateral.
• Maintaining security interest on all of its assets, meaning owners must request to sell some assets.
• Controlling its finances and requiring owners keep a checking account at their institution.

Select a factoring company for increased cash flow and credit advice.

Contact us today for more factoring information.

Apply Online or Call 1 855-322-8671.