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.
