Accounts receivable factoring is a way to get funding for a business, and for a growing number of companies it is in fact the only way to get working capital. Quite a few banks these days aren’t in a very generous mood to lend money to small businesses, and so getting money from factoring companies is the only way to go.
In factoring, you exchange your accounts receivable for cash now, instead of waiting for 30 or 6o days to get paid. The factor gives you about 80% of the value of the invoice (take note that the actual percentage varies) and then you receive the rest of the value of the invoice (minus the fees of the factor) once your client pays up in full.
This method of obtaining capital has its fans and critics, and some of these people are responsible for some of the myths concerning factoring. So let’s tackle these misconceptions once and for all.
It’s too expensive. Aside from paying a percentage of the value of the invoice, you may have to pay several types of fees to the factor. Add all these costs together, and it may very well turn out to be a more expensive method of capitalization than getting a simple bank loan.
But at the same time, you have to face reality. If the inability to get more capital will cost your business a lot of money, then factoring actually makes much more sense financially. It’s easier to get the capital you need this way. With a bank loan, you stand a very good chance of wasting a lot of time applying to get a loan only to have your application rejected in the end. When it comes to your business, you really can’t take that chance.
Factoring will keep your business from failing. Actually, factoring is a great way for your business to foster growth. The money you get depends on your sales, so the more sales you bring in, the more money you can get in advance.
When your business is failing and your stakes are declining, then factoring may not be much of a help for your business at all. Remember, you get an advance on the value of your invoices with factoring. If the value of your invoices are falling by the wayside, then your advance money from the factors are reduced as well.
Factoring could damage your relationship with your customers. This myth stems from the SOP that your client pays your factor directly. Some people seem to think that factors are likely to harass your clients to pay up (the way credit card collections people do). But that’s not the case at all. While the factor may send courteous reminders, getting your clients to pay will still be your job. When your clients are late in paying, you may even end up paying a penalty because of it.
Hopefully, we have clarified some issues that are muddying the waters, and you now have a clearer understanding of what accounts receivable factoring is all about.
Receivable factoring companies offer money in cash for your account receivables invoices, which they collect for you and from which they get a certain percentage as fee. Choosing among them to solve your cash flow situation will depend upon a number of factors and these are discussed below.
How Much Do They Charge For Their Services?
Receivable factoring companies have their own ways of charging for their services. There are generally two ways in which they earn their money:
The first is the percentage of the total amount of the receivables’ total face value. For example, when if the total amount of the accounts receivables is $100,000 then you may get up to $90,000 right away instead of waiting for a few weeks or months to get it all. Some companies may offer a larger percentage for your share than their competitors.
Each transaction often comes with its service fee, which may range from 0.5% to 3% of the bill. This is why it is preferable to turn over only your largest accounts instead of a lot of smaller ones. If you have a single account which owes your company $100,000 then the service fee may be nearer to 0.5%. But if that total is comprised of many little accounts, then the service fee for each may be nearer to 3% because they increase the workload of the factoring company.
How Do They Treat You As A Customer?
Once you have entered into an agreement with a receivable factoring company, at some point you will have questions for them to answer while they process the billing. The way they deal with you is important, and the best receivable factoring companies make sure that you have plenty of ways to communicate with them. They also make sure that they reply to your queries promptly and with all the necessary information you require.
So if a factoring company merely gives an email address as a way to contact them, don’t be surprised if they are tardy when they respond to your questions. This lack of communication increases the chance of misunderstanding between the two parties later on.
How Do They Interact With Your Customers?
Since a factoring company will be the one to handle the collections of the bills that are due to your company, the manner in which the factoring company interacts with your customers can affect your business as well. In a way, they represent you in the eyes of your customers. And if they are overbearing and discourteous when they go about collecting the money from them, the factoring company won’t be alone in getting the blame. In fact, the customers may place most or all of the blame on your business. After all, you chose them to collect the bills for you.
So get some feedback as to how receivable factoring companies do their collecting, and how professional they are when dealing with customers. It may be better for the future of your company to pay just a little more in terms of interest and service fees to ensure that you and your customers are treated properly.