Is Invoice Factoring a Scam or is it Legit?

Is Invoice Factoring a Scam?

Invoice factoring is not a scam; it’s a 100% legitimate financial vehicle where businesses sell their open invoices to a factoring company for immediate cash. 

This can be useful for any business that needs access to quick cash on their outstanding invoices.

However, like any financial company, there are always some bad actors.  Alliance One has been open since 1996 and we have a terrific track record of success.  

Selling your open invoices to a factoring company can be a wonderful option to access instant cashflow.   The largest companies in the world need cashflow to survive.  Below are some pros and cons to consider:

Pros:

1. Instant Cash Flow: You will get immediate cash instead of waiting 30, 60 or even 90 days for customers to pay their invoices.
2. No Debt: Factoring is not a loan, so you don’t incur new debt
3. Simple Qualifications: Alliance One is a direct lender, we have in-house underwriters, we can alter our factoring program to fit your needs.  We are not brokers, there are no middlemen that are earing commissions on your deals, so our rates are typically lower. 
4. Credit Scores: We pay you and your customers pay us directly.  All you are doing is selling your invoices at a discounted rate for immediate cash.  Your credit, good or bad, has no impact on your approval.    
5. Focus on Growth: You worry about growing and running your business, we will make sure you are fully funded. 

Cons:

1. Cost to Factor: Factoring fees can be high, typically ranging from 1% to 5% of the invoice value, depending on how long it takes for your customer to pay their invoices.  Typically, customers pay within 30 days.  If your customers are on net 30-day terms, factoring is less expensive than accepting a payment via credit card. 
2. Customer Relations: The factoring company needs to contact your customers to verify all invoices.  We need to have communications with your customers for verifications, collect invoice payment status and to send out a onetime notice of assignment.  The factoring company needs to make gentle reminders if an invoice is past due.  Some of our customers see this as a positive while others see it as a negative. 
3. Non-Recourse Factoring: Most factoring brokers and direct lenders obtain credit insurance for invoices purchased.  There is a common misunderstanding about the insurance that the factoring company secures.  Insurance protects the factoring company and the customer (customer of the factoring company) from a debtor (our customers, customers) becoming insolvent.  If a company becomes insolvent for any reason, even after we advanced on their invoice, we do not come back to you to recoup our loss.  The insurance company will make the factoring company whole.  This insurance only applies to insolvency.  If your customer does not pay their invoice for any other reason, the insurance does not cover this, and the factoring company will be made whole by the customer. 
4. Long Term Contract: Most factoring companies have a minimum of a one-year agreement.  The agreement goes over the factoring fee, advance rate and general terms of the contract.  If you are looking to sell one invoice and walk away, you will need to search for a spot factoring company.  Traditional factoring companies have minimum invoice requirements to become a customer.  To see if you qualify for factoring with Alliance One, please click here

Should you Consider Factoring?

• Do you have slow-paying customers and very little cashflow?
• Can you qualify for a traditional loan? 
• Do you need to cover immediate short-term expenses like payroll or inventory?

Depending on how you answered the above questions will determine if invoice factoring can be the right choice for your business.