Factoring may be one of the most underutilized yet effective forms of funding for a growing business. It may also be one of the most misunderstood and overlooked types of funding.
Below, Sky Business Credit addresses and explains 11 myths about factoring.
Myth 1: Factoring is for companies having financial problems.
Factoring is not for companies that are having financial problems. When companies have financial problems, it’s because they aren’t getting paid by their customers.
Myth 2: Factoring is a loan.
Factoring is not debt. The factor purchases the invoices, then collects payment directly from the business’ clients. As soon as you fulfill the sale, we advance up to 90% immediately with the remaining amount (less a small fee) once the customer pays – rather than waiting 30-60+ days to receive payment. Factoring should not be looked at as a “loan” but instead as a cash flow tool to help you grow your business.
Myth 3: Factoring is expensive.
It depends on how you’re using it and what you’re comparing it to. Factoring can be expensive if you don’t use it as a growth tool. In most cases, it’s less than credit card processing fees. If you can grow your business because you now have immediate access to the cash generated when you invoice your customer—which results in consistent cash flow you can count on—your increased profit will far outweigh the cost. Not to mention, it’s less expensive than passing up a sales opportunity because you don’t have the cash to deliver!
Myth 4: You must factor every invoice.
Clients are not required to factor every invoice. Clients can pick and choose which customers they want to factor invoices for (as long as the customers are creditworthy).
Myth 5: Factoring is for start-ups and/or seasonal businesses.
Factoring is for all businesses with accounts receivables. It isn’t based on the size or age of the business. Since factoring works best when it’s used to help a company grow, it’s best leveraged when it matches where the company is in the business cycle, and then it can scale according to growth. Factoring generates working capital quickly, right when you need it, so you can manage your business effectively and efficiently.
Myth 6: Your customers will hate that you’re using an outside party for collections.
This is a top concern of many businesses. But the truth is, customers are used to paying invoices through outside third parties—they don’t care who is listed on the invoice! In addition, we try to be as least intrusive as possible and are professionals at managing and collecting receivables.
Myth 7: You must pay the factoring fee out of pocket.
The factoring fee is paid when the invoice is paid.
Myth 8: It takes a long time to get approved for factoring.
Approval is fast. It occurs in a matter of hours or days—it’s almost immediate.
Myth 9: All you get from factoring is money.
Factoring provides several value-added activities, including receivables management, credit management, collection assistance, in-depth reporting, and more.
Myth 10: Factoring is disingenuous.
This can depend on the factoring company. Sky Business Credit is transparent: We copy our clients on all communications with their customers and do as much via email for both openness and to leave a paper trail. We ensure the client is both aware and included in everything that engages with customer communications.
Myth 11: Factoring has hidden fees.
Factoring does not have hidden fees. We charge a straightforward discount fee. There are no additional fees, monthly or otherwise.
The truth about factoring: Factoring gives businesses the cash flow and working capital it needs to grow.
To learn more about factoring and to discuss if this form of financing is a good fit for your business, please reach out.