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Factoring Information

Factoring - Six Common Misconceptions

Factoring is a flexible source of finance; a loan backed by assets but not your house your sales invoices.  Lending is based around projected turnover but if you don't raise the invoices you don't get the money.

Factoring is the purchase of your accounts receivable, at a discount, by a factoring company.  The purchase of an asset for which you pay a fee - It's NOT a loan with interest due!

When should you consider factoring for your business? If you find yourself saying any, or indeed all, or the following

  • If only I could get my customers to pay on time I could…..
  • My overdraft is so restrictive
  • If I had more cash I could grow my business quicker
  • I'm having to turn away new business
  • My partner hates having to use our house as security for the business
  • The business lost money last year but now things are improving I need cash to grow

There are plenty of misconceptions around factoring which cause many business people to have strong emotive reactions.  So what are the misconceptions?

Six Factoring Misconceptions:

1)      The factoring company gives you up to 90% of your invoice then keep the rest. Actually factoring companies return the remaining 10% when your customer pays.  In reality you will normally pay a service fee to cover the day-to-day management of your invoice finance facility, and to cover the costs incurred by the invoice finance partner in looking after your purchase ledger.  This fee is normally calculated based on your projected turnover.  Probably you should expect to pay between 0.3 per cent and 0.5 per cent of your turnover as a service fee.  Sometimes you might want credit insurance too.

2)      Factoring is for companies going bust. If your business is expanding then invoice factoring is ideal as the finance available to you grows with the sales.  Business owners more than anyone else understand the difficulties in securing outside funding.  Generally factoring companies don't want companies that are failing as a failed company means potential insolvency disputes when customers realise the situation and debts become more problematic to collect.  Factoring companies have to believe in the business, the management team and the strategy for the company.

3)      If customers realise you're factoring they'll leave you! Your business will have the support of a factoring company (a financial institution) - what better way to say your business is growing and being successful.  Often the customers who don't like you dealing with a factoring company are often the very ones that don't pay you on time!  Also as your customers are dealing with a larger financial organisation, any payment delays could affect their own business' credit rating. Contrary to popular myth most businesses use factoring facility to expand their business not to survive.  Surely to have access to funds when you need it should put your customers at their ease because you will be better equipped to grow and to meet their demands.  Wouldn't your customers prefer to continue working with a well-funded you, rather than starting a new relationship with another supplier.  A new supplier that may or may not be financially viable!

However modern factoring companies are aware of the issues and an increasing number of factoring providers offer a more transparent service, where communication with your customers appears as if it's come directly from you.

4)  Factoring companies upset and annoy your customers with collection calls. A factoring company's objective will be to enable you to do more business.  Therefore, it is in their interest to help you succeed.   It's wrong to think that a factoring company would intentionally annoy and frustrate your customers with calls for overdue invoices.  Often, through a more professional and systematic approach a factoring company improves and enhances the collection process.

Perhaps factoring companies achieve better collection because your customers realise that if they don't pay promptly it could directly affect their own credit ratings?  Perhaps it's a question of systems or simply the fact that they ask to be paid!

5)      Factoring is too expensive. Actually perhaps the question you should ask yourself is - will having factoring generate more revenue than it costs?

If you're smart you can get better terms from your suppliers - you have the cash to pay.  You can pay staff on time, you can pay your bills and more importantly you can use the cash to increase marketing activity and consequently sales.  Obviously if the answer's no - then don't do it.  But what would you do if you didn't use factoring to support your business - take out a loan, increase your overdraft, use your credit cards - in these harsh economic times what are there any better alternatives?  Simply put, factoring is another form of financing for your business but the funds are secured based on invoice values and not secured by property.

What factoring does is the equivalent of you having invoice terms that are cash-on-delivery.  What you have done is receive substantial upfront payment for which you've allowed a discount. The real outcome for you business should be that with better cash flow you can grow your business rapidly and your profit should increase as a result.

6) Factoring is only suitable for large businesses and PLC's. Perhaps this used to be true but today more and more small medium sized businesses are using factoring.  You simply need a projected turnover of £50,000 and to invoice other businesses with payment terms between 30-90 days.

Almost any B2B company can receive funding through factoring. Why not improve your business cash flow.  Start by getting quotes for your business today.

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