Authored by Phil Cohen
Though a perfectly viable option for business financing, there are a lot of misconceptions and myths about invoice funding. The lack of understanding about what invoice factoring is and does contribute to the delusions about the practice, when in fact, invoice factoring is not all that different from a business loan. (Just without the debt, high interest rates, strict approval and lengthy process)
Misconception #1: Invoice factoring is only for businesses with cash flow or other money problems
In truth, invoice factoring is a way of managing your cash flow more effectively and efficiently. The process basically lets you use your customer invoices as collateral in exchange for cash, which the factoring company earns back by collecting on the invoices. Many businesses actually use invoice factoring as a way to expand their businesses because the invoice factoring process is quicker and typically simpler than trying to apply for a business loan from a bank. It also frees up time that would otherwise be spent chasing invoices and lets you focus on the growth and success of your business.
Misconception #2: Factoring looks bad to your business’s customers
As mentioned above, invoice factoring can actually be used to expand your business and so even if that’s not the purpose, it shouldn’t be construed as bad in your customers’ eyes. Additionally, factoring is a method of outside funding and as that sort of capital is usually hard to secure, the fact that your business qualifies is good, though factor approval is basically dependent on the credit-worthiness of the business’s customers. The only effect invoice factoring will have on your clients is that rather than making their checks payable to your company, they will write them out to the factoring company, and the factoring company will take care of informing your customers of the change.
Misconception #3: Factoring companies will harass your customers or clients with collection calls
This notion is completely untrue; a factoring company benefits the most when the relationship between business and customer is good and to harm this connection would be to shoot itself in the foot. A good factoring company will be courteous and conscientious when following up with clients about payment on invoices. Factors will strive to make the payment process more efficient and occasionally call to remind customers about payment owed. In no way will they be harassing your customer.
Misconception #4: Factoring is too expensive and will take a huge cut of value from your invoices
While factoring invoices does come with a fee, the exorbitant price tag many think factoring comes with simply isn’t there. Factoring costs are competitive and usually more reasonably priced than other financing options, with faster approval time as well. That said, a bank loan may come cheaper in the short term, but the process will take longer and the interest due will be higher. With factoring, you are selling your business’s invoices and the factoring fee really can’t compare to the amount you’d owe on your borrowed money at the end of your loan period with a bank. Factoring will advance up to 95% of the value of your invoices upfront, and the rest is given to you when the customer pays their bill, minus a small fee the factoring company takes based on the turnover.
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