Factoring Facts for the CPA

Posted by Factor Funding Co. on December 9, 2014

Business owners trust their CPAs to look out for their best interests. They want their accountants to make sure their taxes are paid on time, that their books are balanced and kept up-to-date and that their businesses have the steady cash flow that is needed to remain profitable and viable.

However, as dutiful and informed as many CPAs are, they sometimes lack the basic understanding of financial resources that could ultimately help their clients even more. When their primary focus is to protect their clients' bottom lines, CPAs should understand these important facts about factoring.

Factoring Is Not a Loan

Many CPAs are reluctant to consider factoring for their clients because they mistakenly believe that this transaction is a loan. In fact, it is not a loan, but rather the sale of available assets, namely the client's outstanding invoices.

Accountants rightfully so should protect their clients from unwarranted borrowing and monthly payments that could break their cash flows. However, given that factoring involves buying a business' invoices, the company gets money that it needs today without the obligation of having to pay back an expensive bank loan.

Factoring Is Affordable

CPAs have the duty of protecting their clients from high interest rates and going upside down on their financial transactions. They often become confused when they see that a factor will buy an invoice for a three percent discount, thinking that this percentage translates into an interest rate of 36 percent each year.

However, it is vital that accountants understand that the discount applies to this single transaction and is not an annual interest rate. In fact, this amount is typically cheaper than taking credit card payments or borrowing money from a bank. With that, factoring can be a much more affordable option to bulk up a client's cash flow and get that company the money it needs today.

Factoring Is Not a Long-Term Commitment

Many accountants fear that factoring will require that their clients engage in a long-term and expensive relationship with the factor. However, this transaction is fast and convenient and does not require a lengthy commitment that comes with a bank loan.

In fact, many factoring transactions can take less than a month to complete. Once the factor buys the invoices, it will take over collecting the money owed by the company's clients. The company will receive its money and be able to continue with its regular business without having to wait weeks or months for its clients to pay their financial commitments.

Factoring Poses No Credit Risk

One of the biggest risks of taking out a bank loan involves the hard hit to a business' credit report. If an owner is trying to establish good credit or perhaps even has poor credit, it may be impossible for this person or the business' CPA to get financing through a bank.

As such, a CPA may believe that a factor will scrutinize the creditworthiness of the business owner and put that person's credit file in jeopardy. However, it is the credit of the invoice holders that comes into play and upon which the final approval for the factoring transaction will be based.

Factoring Provides Cash Quickly

Accountants understand the trial that can come when a business owner needs cash today, but has few ways to actually obtain it. They may think that a factor transaction takes weeks to finalize, much the same as it takes a bank loan weeks to come to fruition.

However, business owners can typically fill out a fast online application, provide the invoice details, and receive an approval within a day, if not sooner. They can then use that cash to:

  • Pay bills
  • Make payroll
  • Expand their client bases
  • Bid on new projects
  • Buy inventory
  • Pay vendors
  • Invest in advertising or new marketing

The money that they receive for their invoices can be used for any purpose without the in-depth explanation that often precedes approval for a bank loan. CPAs who understand the convenience and speed that can come with factoring often are eager to encourage this option to their clients.

CPAs have the obligation to protect their clients' finances. They can advise business owners accordingly by understanding some basic facts about the benefits of factoring.

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