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