Common Fallacies about Toronto Accounts Receivables Factoring

Trade receivables financing specifically invoice factoring is becoming very common all over the world. However, in Toronto accounts receivables factoring is still subject to a lot of misconceptions. So to set matters straight, here are some of the more common fallacies:

  1. Factoring is only for large companies. Admittedly, this fallacy was actually a fact more than 2o years ago. But today, factoring is used by small and medium sized businesses as well. This is especially true since the recent recession, when banks became much more cautious about lending money to small businesses. The factoring industry opened its arms to SMBs and this relationship has become stronger since.

By 2013, factoring worldwide was a $3 trillion business, and that’s not all with large corporations, obviously. According to Forbes, alternative means of capitalization for small businesses such as factoring would be a major trend for 2015.

  1. Factoring is very expensive. Again, this depends on how you look at it. At first glance, it is true that the cost of factoring may be greater than what a bank would charge in interest for a business loan. But according to one report, big banks approved only 21% of small business loan applications in January 2015. That’s a rejection rate of 79%! For small banks it’s a bit lenient, but the approval rate is still less than 50%.

So you don’t compare the cost of factoring to the cost of a bank loan, which is something you’re unlikely to get anyway. What you should compare it to is the cost of not getting the money from factoring. How much would it cost you if you can’t get the funding needed to cover the payroll, buy supplies, or get a move on in your advertising? If the advance money you get from factoring increases your sales to up to 50% then isn’t that money well spent?

  1. Factoring is a last-ditch effort to save a failing company. Now this is absolutely not true at all. While some companies do use the money for such dire emergencies as meeting payroll, the truth of the matter is that factoring companies mostly do business only with companies with a future. The factors think that the company can overcome these temporary setbacks.

The real truth of the matter is that most businesses use factoring for growth, and not just for survival. The proof is that they have creditworthy customers who pay fully and on time, which is what the factors look for when they offer the advance on accounts receivable. They give you the money in advance so that you don’t have to wait 30 or 60 days, and they get back the money when the customers finally pay up.

  1. The collection methods of factoring companies may alienate customers. Again, there is no truth to this nonsense. Factoring companies simply notify your customers of where they should send their payments, and they also send them very polite notices about overdue bills. When there’s a real problem about a non-paying customer, then you’re called in and you’re asked to deal with your customer yourself.

In Toronto accounts receivables factoring is also poised to make a big splash among the small business market. When the truth about factoring spreads, there’s no doubt that small businesses will take advantage of this opportunity for capitalization.

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Chris Lanchech

Hi everyone, my name is Chris and I am a junior analyst at Neebo Capital and an inspiring blogger. We enjoy speaking with business owners and entrepreneurs who come to Neebo Capital looking for cash flow solutions.

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