Though a great funding source for many businesses to enhance and support growth, factoring is often viewed negatively because of misconceptions or myths. Factoring is the process of buying invoices to generate cash quickly instead of waiting 30, 60 or 90 days for your customers to pay. It is different than a bank loan, primarily because it is not debt, and it is usually a quicker process. Below are some common misconceptions about factoring.
Myth 1: Factoring is too expensive.
It is commonly believed that it is very expensive to use factoring to fund a business. Actually, using factoring to grow a business is less costly than other ways, such as giving away equity or passing up a sales opportunity. Factoring is competitive and affordable, with fast approval time as well. Unlike bank loans, factoring advances a set percentage of your invoice immediately with the balance, less the factoring fee, paid when customers pay their invoice. The factoring fee is usually based on how quickly the invoice is paid and usually range between 2-3 percent of an invoice amount. The benefit of receiving cash flow quickly usually outweighs the small factoring fee. Lastly, factoring companies usually provide additional services, including accounts-receivable management and credit analysis.
Myth 2: Factoring is only for troubled companies.
Yes, factoring is used to help struggling companies survive. However, factoring is more often used for a growing business. Many times, companies are not able to receive a bank loan for reasons completely unrelated to their creditworthiness, such as a being a start-up, seasonality in sales or rapid growth. Invoice factoring is a way of generating working capital quickly, when you need it, allowing you to manage your business effectively and efficiently.
Myth 3: Factoring looks negative towards your customers.
When notifying customers of a factoring agreement, it should be presented as a way to assist the business -“to enhance its business and support its growth”. Factoring is actually beneficial to your customers because it allows you to have the funds needed to respond to their needs.
Myth 4: Factoring companies harass your customers for collections of invoices.
Many factors, like CFR, partner with their clients to collect outstanding payments. To be successful, factoring companies need the relationship between a business and customer to remain healthy and positive so they can continue to do more business. A good factoring company should always provide excellent customer service, remain professional and helpful to everyone.
Myth 5: You have to factor every single invoice.
Contrary to popular belief, a business does not need to factor all of its invoices. Companies can choose the invoices to factor depending on its business’ needs. Additionally, although all payments need to be remitted to the factor, at CFR, customers can continue paying invoices in your business’ name.
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