Is Factoring a Smart Decision for Your Business? Debunking and Revealing 5 Common Myths About Factoring

Business owners know that there are multiple sources of financing available that can support their business. Whether structuring business finances to accommodate rapid growth, or facing funding challenges due to negative operating history or any number of other reasons, accounts receivable financing (a.k.a. invoice factoring) is an option that will always be worth considering.

While it may not be the first option that comes to mind, working with a factor can unlock the much-needed access to working capital and growth capital, setting the business up for long-term business success.

Invoice factoring is not a new phenomenon, but it is often misunderstood by business owners. Allied Affiliated Funding discusses some of the common myths about factoring that the business community may have heard.

Myth 1: Invoice factoring is a last resort and lifeline for businesses that are in serious financial trouble.

Allied Truth: Factoring can be a positive and applicable solution for businesses in many different industries and many different situations. It is a valuable financial tool that provides quick cash flow for startups, businesses that are growing too fast per traditional banking standards, and for companies in financial transition (not always a bad thing). Accounts receivable financing offers business owners the flexibility to grow their business, purchase new equipment, meet weekly payroll obligations, and cover other operating expenses.

Myth 2: Factoring is very expensive.

Allied Truth: Rates can vary for a number of reasons, but generally speaking, the cost of factoring is oftentimes just a percentage point or two of the total invoice amount. During certain stages of your business’ growth lifecycle, factoring may be the best and lowest cost option. Consider this: using factoring as a financial tool to grow your business is far less expensive than giving away equity in your business or passing up on a sales opportunity due to a lack of capital. In most cases, the benefits of generating quick cash flow through factoring is far greater than the minimal factoring fee.

Myth 3: My customers will be upset when they find out we are factoring invoices.

Allied Truth: We understand that your relationship with your customers is a top priority, but there is nothing to fear. Rather than leaving when they learn you are utilizing the tool of factoring to increase your cash flow, your customers may view that as a perk. By seeking the backing of a factor, your customers will know that you have financial support and can afford to meet their needs, no matter the lead time. Invoice factoring allows you to spend more time focused on building relationships with your customers, instead of spending that time collecting on invoices. Your clients will appreciate and notice that you have more time to serve their needs and fulfill their orders.

Myth 4: Factoring companies will harass my customers to pay their invoices.

Allied Truth: Dependable and trustworthy factoring companies provide exceptional customer service and will never harass your clients for payment. Before entering into a relationship with a factor, seek references from the factor’s clients to find out how the factoring company works with them and their customers. Many factoring companies take great pride in customer service, going the extra mile to act as a partner to their clients and their clients’ customers. Good factoring companies want to keep their clients happy and know that taking excellent care of their clients’ customers is a crucial part to that equation.

Myth 5: It is better to get a bank loan or traditional line of credit.

Allied Truth: It depends on what the definition of “better” is. A traditional loan or line of credit will be less expensive, but it may not provide a large enough loan/line size, or it may have financial covenants that the business owner cannot keep. Factoring does not have stipulations on how the money is utilized like traditional lending does. Factoring has fewer restrictions in many ways and often provides a higher amount of available funding to business owners. It is also important to remember that bank loans mean debt for your business, whereas factoring is not classified as debt and does not increase the debt number on the balance sheet. Traditional funding through a bank line of credit may be more common, but that doesn’t mean it is always the best option. Every situation is different, and each type of financing should be assessed according to the business’ goals.

Invoice factoring, or accounts receivable financing, can be a reliable, flexible, and cost-effective funding source for businesses of all sizes in any industry. There are certainly misconceptions that many business owners have about factoring, but they are just that — misconceptions. If you would like to learn more about factoring and find out if it might be a viable option for your business, contact Allied Affiliated Funding, a division of Axiom Bank, N.A. today to learn more about how we can help.