Factoring can be a bit scary for companies that are not familiar with it, or that had bad experiences with it in the past. Due to this fear, these companies shy away from any discussion of the topic. These fears may be costing them opportunities they didn't even know were out there.
Here are a few reasons why you shouldn't fear factoring.
Factoring has been around for at least 4000 years.
That dates back further than the time of King Tut. It was and still is an acceptable practice for businesses in cultures around the world. Of course, today's factors do business in the modern world. But, the concepts are still the same because it is a tried and true method for freeing cash up when it's needed.
You don't have to have perfect credit to qualify for factoring.
If you have ever tried to get a bank loan for your business, you know how arduous the qualification process is. And, if your company has not been in business long, or has a spotty payment history, it is likely you didn't qualify for that loan. With factoring, your credit doesn't have to be perfect. Factoring looks at the creditworthiness of your customers. While the factor will make sure your company is being run on sound business practices, a perfect credit history is not an impediment.
You can free up the cash you need to meet your obligations and grow your company.
How many months have you spent moving money around just to meet payroll? How many big orders have you had to pass on because you didn't have the money to buy inventory? Those are both common situations that small businesses face, especially when cash flows are tight. With factoring, you can free up the cash you have tied up in open invoices. That allows you to meet your obligations and take on those big orders, all while sleeping better at night.
Factoring is not as expensive as you might think.
Many people get nervous when they hear that a factoring company charges 3% per month for a factored invoice. They automatically multiply that 3% by 12 and come up with a 36% annual interest. Those are loan shark rates. But, factoring fees work differently than bank loans do. Since you don't normally wait 12 months for a customer to pay, the fee is not anywhere near the 36% mark.
You don't need to make a long-term commitment.
Some factors do require that clients sign long-term contracts. But those factors are actually in the minority. Most factoring companies offer contracts that are 3 to 6 months long. Of course, they offer longer contracts as well. Now, the only caveat to a short contract is that the fees will be higher. But, if you are hesitant to factor, a short-term contract will let you see how things work and if it is a good fit for your company's cash flow needs, without locking you into a long-term obligation.
You can customize the factoring terms to your business model.
Factoring companies generally deal with a variety of businesses. They have developed flexible factoring models to meet the needs of most businesses. If you work in a specific industry that has unique payment terms as a rule, you can work with an experienced factor to customize the way you deal with your invoices. You will also find many factors have already built models around certain industries, making factoring a breeze.
You no longer have to worry about the day-to-day work involved with accounts receivable.
When you factor invoices, the factor takes those invoices over. They will verify the invoice is valid, process payments, and handle any collections you might need. Your customers will only know that you have outsourced your A/R to another company. They will just be sending their payments to a different address or talking to another person on the phone.
You have 24/7 access to your A/R information.
Almost all factoring companies doing business these days offer online access so you can review the details surrounding your account. You can see the details on all the invoices you factored, how much money is available, and if any of your customers are late in making payments. You can also call the factor to ask questions during normal business hours.
Don't let your fears about factoring stop you from learning more about it. Getting the facts will help dispel those fears and get you on the road to better cash flow within your business.