Invoice factoring has existed for hundreds of years as a source of business funding and it is becoming a go-to funding source for businesses that don’t want to rely on traditional financing through banks. Alternatively, invoice factoring can be a confusing and mysterious topic. Some business owners have a negative perception, especially if they have been exposed to myths or misunderstandings about the practice.
The following are examples of common myths that cause companies to shy away from factors, along with the actual facts that debunk them.
Myth 1: Factoring is only for small, start-up companies
Although it is true that advancing cash on unpaid invoices will help a start-up company grow at a faster pace, much older, mid-sized companies factor as well. Factoring is a quick, inexpensive solution that does not require a cumbersome approval process.
Myth 2: Factoring is expensive
You may have heard that factoring costs more than the average interest rate on a loan. While that is untrue, it does depend on who handles your factoring. Most factors offer fees that are competitive with bank loan rates, depending on the client’s monthly invoice volume. However, as with any service, it is important to shop around before selecting a factoring company.
Myth 3: I can’t use factoring if I have a low credit score
Not only is this false, but it is also actually an advantage to go with factoring over traditional financing if you have a low credit score. Your business does not need to have a credit history to qualify for factor financing. Providers rely on the creditworthiness of the business’s customers when qualifying for factor financing.
Myth 4: You have to factor every single one of your invoices
This is largely false. While it is true that a factoring company will expect a consistent, continuous flow of invoices, few factoring companies require their clients to factor all of their invoices. Many companies will choose to factor invoices from certain customers, simply because they make up a large portion of the company’s business or tend to wait longer to pay.
Myth 5: Factoring companies harass your customers
For any factoring company that wants to be successful, they will treat your customers professionally and with the utmost respect. Due to the fact that the factoring company is required to gain the customer’s permission to factor invoices with them, it is vital for the factoring company to treat your customers professionally and with the utmost respect.
Myth 6: Bank loans or lines of credit are always better
While it is true that it may be cheaper to go with a bank loan or a line of credit, it is often far less flexible when compared to factoring. It comes with more restrictions and regulations. In addition, it is important to remember that bank loans and lines of credit are debt, whereas factoring is not.
Myth 7: All factoring companies are the same
This might be the greatest misunderstanding of all. As with any industry, some factoring companies are better than others. When a business realizes that providers want to be a partner in their growth, it can be the beginning of a solid and mutually beneficial relationship. However, some factors have extra services, rates, terms, industry specialties, and quality of client services that differentiate them from every other factoring company. Do your research to find the best factoring company for your needs.
If your business needs to help to understand the practice of factoring or is in need of a reliable source of capital, contact us at your earliest convenience.